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GST on corporate guarantees: Taxmen believe clarity will emerge only in SC

May 13, 2024

The issue of levying GST on corporate guarantees between related entities remains uncertain until the Supreme Court's final decision. The CBIC's circular clarifying the levy's validity faces legal challenges, with recent stays offering temporary relief to affected companies. The matter's resolution will impact businesses and tax revenues.

A clarity on the contentious provision of levying GST on corporate guarantees between two related entities will emerge only after the supreme court gives its final word on the subject, and until then, holding companies are likely to keep getting demand notices, a section of GST officials told ET.

Several companies caught in the crosshairs of the GST authorities got a sense of relief last week after the Punjab & Haryana High Court stayed operation of a central board of indirect taxes & customs (CBIC) circular clarifying on the validity of the levy.

CBIC’s October 27, 2003, circular had clarified that a corporate guarantee, provided by one company to banks or financial institutions to help an associate company secure a loan, even without a consideration, should be considered supply of service between related parties under the Schedule I of the CGST Act, 2017.

Ever since the CBIC put out the clarification, the GST authorities have started demanding GST at 18% on one percent of the value of corporate guarantees.

The latest stay, issued in the case of Acme Cleantech Solutions, arises from a legal challenge the company mounted on both the constitutional validity of the guarantee as well as its valuation for levy of the impost.

The recent spate of stay orders from different courts in favour of petitioner companies would not prevent demand notices to other companies, GST officials in Bengaluru said, declining to be identified.

The authorities, while acknowledging the recent stay order stopping the operation of the circular, said the subject would hang fire till it finally gets settled in the Supreme Court. “Until then, the stay order issued by the court in Chandigarh will only have a persuasive value in cases pending before other high courts,” the officials added.

Hundreds of petitions challenging the October 23 notification of CBIC are pending before high courts and most have not paid the taxes, they said. "We got very little revenue from this as most of the demand notices remain stayed by courts," the official added.

The GST authorities are sending notices to India-based holding companies to pay up the GST. In case a holding company is overseas, its Indian subsidiary is facing the GST demands.

In the GST regime, any input tax credit (ITC) is adjusted against output tax liability and there is no cash refund in the event ITC is in excess, except in cases of exports. It hence becomes a cost on businesses, defeating the very purpose of ITC and becomes a cost on the economy as well, said HD Arun Kumar, a former additional commissioner in Karnataka’s commercial taxes department.

Businesses also have restrictions to claim ITC as a result taxes cascade in many cases, he added.

The subject has become a contentious one ever since the Supreme Court, in the case of Edelweiss Financial Services, held, last year, that the service tax on corporate guarantees does not arise in the absence of a consideration. In a note in March this year, consultancy firm Grant Thornton said, the challenge to GST levy and valuation rules will have multi-faceted implications and will be closely monitored by taxpayers.

[The Economic Times]

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