Before Finance Minister Nirmala Sitharaman, Real estate developers have made a representation to revise the circular that levies an 18% GST on the corporate guarantees provided via concerned parties.
“According to developers, GST at 18% rate should apply to either the actual consideration or 1% of the guaranteed amount, choosing the lesser of the two,” shared a credible source. It’s important to note that, as per the circular, GST will be calculated based on the higher value between the actual payout or 1% of the loan amount.
Apart from real estate developers, other industry associations are preparing to present their case to the government regarding the recent ruling. “Given the ongoing court vacations, we plan to file the writ petition in early to mid-January” mentioned another source.
Simultaneously, government sources indicate the likelihood of the upcoming GST Council meeting addressing the aforementioned issue. The 53rd Council session is anticipated to convene in January. Analysts predict a substantial impact from the recent Council decision on the infrastructure and real estate sectors, both heavily reliant on external funding for large projects.
The new regulation stipulates that the taxable value of corporate guarantees will be either 1% of the guarantee amount or the actual consideration paid for issuing the corporate guarantee, whichever is greater. Consequently, GST will be applicable on guarantees involving related parties, even if the subsidiary company can’t claim a full input tax credit. This proposed rule aims to establish the valuation used for tax assessment purposes.
The assertion was made that guarantees provided by the parent company to lending banks shouldn’t be classified as a service rendered to the subsidiary. The argument rested on the premise that guarantees, considered actionable claims, don’t align with the definition of goods or services and, therefore, shouldn’t be liable for GST.
The predicament wherein the parent company, owing to commitments made to banks, couldn’t levy any consideration on the subsidiary. This fact bolstered the argument against imposing GST in the absence of any consideration involved.
Impact of GST Council Ruling on the Real Estate Sector
Industry specialists anticipate a substantial impact from the GST Council’s recent ruling on the infrastructure and real estate sectors, both of which heavily depend on external funding and loans for large-scale projects. Realtors are considering filing a writ petition in either the first or second week of January.
