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GST on corporate guarantees: Experts await more clarity

Mumbai, Feb 28, 2024

Indirect tax experts are awaiting clarity on the levy of goods and services tax (GST) on corporate guarantees given by Indian companies on behalf of their subsidiaries following a notification issued by the finance ministry in October.

The 26 October notification had clarified how much value to be ascribed to a transaction that provides corporate guarantees when there is no financial consideration involved.

This comes after the Directorate General of Goods and Services Tax Intelligence (DGGI) last year sent out a spate of tax demand notices to Indian companies related to financial guarantees given by them on behalf of their subsidiaries. Earlier, companies did not pay any GST on corporate guarantees as generally no financial consideration is paid for it by the subsidiary.

However, the taxman was of the view that giving such guarantees is a service liable for taxation under GST as it is done by the parent company to maximise its returns on investment in the subsidiary.

Subsequently, the Central Board of Indirect Taxes and Customs (CBIC) clarified in October that in case of such guarantees, when the parent company takes no financial consideration for providing the guarantee, a notional value equivalent to 1% of the guaranteed sum will be ascribed to it.

However, it remains unclear if GST will be levied on the guarantees per year or for the entire period for which the guarantee is effective, experts said.

"Despite recent government clarifications, uncertainty remains around the timing and value of tax levied on corporate guarantees, particularly for long-term agreements," said Saurabh Agarwal, Tax Partner, EY.

There is also confusion on the valuation to be ascribed to guarantees issued before the finance ministry notification was issued. GST became effective from July 2017 while the notification was issued in October 2023. Tax experts seek clarity on the valuation to be ascribed to corporate guarantees in between this period.

“Valuation of Corporate Guarantee has been a topic of consistent debate since implementation of GST," said Payal Thaker, Partner, Indirect Tax, BDO India.

“Since 26 October 2023, the valuation provisions have been amended to bring clarity on this aspect. However, the valuation for corporate guarantees issued before the amendment still remains unclarified as the amendment is prospective," she said. Ideally, the valuation provisions for related-party transactions existing prior to the amendment would be applicable on past corporate guarantees, she added.

Another confusion that remains is whether a similar tax will be levied on letters of comfort given by companies on behalf of their subsidiaries. Unlike a corporate guarantee, a letter of comfort is not a legally enforceable contract. However, it is written by a company to further the business of its subsidiary and can be seen as a step by it to maximise the returns on its investment.

“Since a letter of comfort from a reputable company can help its subsidiary secure a loan or get favourable terms from a counterparty, the tax authorities could construe it as a service, much like in the case of corporate guarantee, and levy GST on the consideration for offering such letter of comfort," said Ranjeet Mahtani, partner, Dhruva Advisors. “In my view, a letter of comfort does not represent a supply, that is service of a commitment or assurance or undertaking regarding repayment of monies borrowed and so, should not be liable to GST."

The confusion arises because under the GST regime, services rendered to a related party for the furtherance of business are treated as supply liable for taxation even if made without any financial consideration. This makes several common business practices liable to taxation depending on the interpretation being taken by concerned tax officers, experts said.


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