The Finance Ministry’s recent notification stated that the GST mechanism for corporate guarantees will apply prospectively.
Following the GST Council’s suggestions dated October 7, a corporate guarantee provided by a parent company to its subsidiary for a bank loan will be subject to an 18% GST. This recommendation was made during the GST Council meeting on Saturday.
According to a notification issued on October 26, the value of services provided by a supplier to a related recipient, in the form of a corporate guarantee to a banking company or financial institution on behalf of the recipient, will be deemed to be one percent of the guarantee amount or the actual consideration, whichever is higher. In practical terms, if the corporate guarantee is Rs 100 crore, the GST liability would be Rs 18 lakh.
Previously, a statement from the Finance Ministry, released following the Council’s meeting, stated that in cases where a company does not provide any form of consideration, either directly or indirectly, to a director for issuing a personal guarantee to a bank or financial institution on the company’s behalf, the open market value of this transaction/supply may be considered as zero. This implies that if a director offers a personal guarantee for a loan from a bank or financial institution to their own company, there will be no GST rate applicable.
Important: Banks Receiving GST Notices on the Usage of Brand Names
It’s significant to learn that this prospective modification will not impact transactions conducted before October 26, 2023, thereby preserving the tax implications associated with previous transactions.
The continuity of corporate guarantees is currently uncertain, primarily due to the conventional practice of imposing consideration at the start of such arrangements. Additionally, corporate entities must conduct a thorough examination of their tax status when they are revisiting or renewing corporate guarantees, especially in situations where contractual limitations prevent the evaluation of consideration.
Notably, industries that enjoy tax exemptions, such as petroleum, real estate, healthcare, financial services, public transportation, and education, might have concerns about the imposition of GST on corporate guarantees. This could potentially lead to an unavoidable and substantial financial burden.
Providing Goods and Services to Special Economic Zones
Simultaneously, another notification has extended the opportunity for suppliers to Special Economic Zone (SEZ) developers or SEZ units to request a refund of the GST they’ve paid. The notification specifies that all goods or services (excluding some items) that fall into the category of goods or services eligible for export with integrated tax payment, also qualify for a refund for the tax paid by the supplier. It also designates all suppliers to an SEZ developer or unit engaged in authorized operations as the group of individuals permitted to provide goods or services (except for some items) to these entities for authorized operations with integrated tax payment, and they can subsequently claim a refund for the tax paid.
This notification effectively eliminates any uncertainty regarding the ability to claim a GST refund on supplies made by domestic suppliers to SEZ. Experts believe this will alleviate anticipated concerns related to working capital for the domestic industry engaged in SEZ supplies.
