Corporate guarantees provided to related parties will be subject to an 18 percent goods and services tax (GST) on either 1 percent of the guaranteed amount or the actual consideration, whichever is greater. On the other hand, personal guarantees extended by the company’s promoter or director may not be subject to taxation.
These clarifications may be introduced by the GST Council during its upcoming meeting, as informed by individuals with knowledge of the agenda to Business Standard.
Once approval is granted, a circular will be issued to provide clarity on the taxation and valuation of both corporate and personal guarantees, as stated by insiders.
If implemented, this action is anticipated to resolve disputes regarding the imposition of GST on guarantees provided by related parties, whether corporate or personal.
At present, tax authorities and taxpayers are adopting different methods to ascertain the taxable value due to the absence of well-defined regulations. Numerous trade associations have submitted requests for clarification on taxation and valuation matters, as they have encountered disputes during GST audits conducted by field officials.
Among the arguments put forth, one contention is that GST should be applied to the sum provided by a holding company to its subsidiary.
Some individuals referred to cases from the pre-GST era, particularly under service tax regulations, where it was established that the nature of corporate guarantees and bank guarantees was similar, and tax was applicable on the commission charged.
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This matter was addressed by the GST Council’s law panel in multiple meetings held in August and September. After thorough discussions, the panel recommended the adoption of valuation rules that align with the safe harbour rules outlined in the Income-Tax Act.
It was noted that under Rule 10TD of the safe harbour provisions (within the Income Tax Rules, 1962) for providing corporate guarantees in eligible international transactions, the minimum acceptable commission or fee is set at 1 percent of the guaranteed amount. Therefore, there is a proposal to consider implementing the same approach for related parties under GST, as revealed by someone with knowledge of the discussions.
While making this proposal, the law panel emphasized that Schedule 1 of the Central GST stipulates that the supply of goods and services, even between related persons without consideration, would be treated as a supply when made to further a business.
Nevertheless, the panel believes that for the sake of consistency in law enforcement across the nation, it is essential to specify the nature of these activities.
It is anticipated that the GST Council will give its approval to these recommendations during its upcoming 52nd GST Council meeting, according to insiders.
A corporate guarantee is an agreement typically within a group of companies wherein one entity, often the parent company, commits to serve as a guarantor for another, such as a subsidiary while obtaining loans or credit facilities from a bank.
These arrangements are typically established either without any remuneration or with a nominal commission based on the loan amount.
To prevent legal disputes regarding the valuation of corporate guarantees among related parties, it’s crucial to establish an exceptionally low presumed value for GST imposition. Ideally, this value should be in harmony with the corresponding provisions found in direct tax regulations.
Concerning personal guarantees, the law panel referenced the Reserve Bank of India’s directive, which explicitly stated that no compensation in the form of commission, brokerage fees, or any other payment could be made to a director by the company, whether directly or indirectly, as compensation for providing a personal guarantee for borrowing credit limits from a bank. There is a query of these supplies or transactions that secures an open market value.
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As per that zero value might be deemed for the open market transaction or supply. In that case, there will be no tax levied to get paid on these supplies of service via the director of the company.
In rare instances where promoters, directors, or other managerial personnel receive any form of compensation, the taxable value of such service supply will be equivalent to the remuneration provided to such an individual or guarantor by the company, whether through direct or indirect means.
