• Notification Date: 06-12-2023
• Notification No: N/A

Companies likely to file Writs against GST on Corporate Guarantees

Several large corporate houses are planning to file writ petitions before high courts challenging the GST Council’s recent decision to charge 18% GST on corporate guarantees given by the holding companies to their subsidiary companies, according to people in the know who did not want to be identified.  

As per experts, the Council’s new ruling will weigh heavily on infrastructure sector as it is dependent upon external financing and borrowing for huge projects. As per the rule, taxable value of corporate guarantees will be 1% of the guarantee amount or the actual consideration (paid for providing corporate guarantee), whichever is higher. This valuation will apply even if the recipient (subsidiary company) can’t claim full input tax credit. This means GST will be applicable on these guarantees between related parties, and the value for taxation purposes will be determined using this proposed rule. 

As per Manish Mishra, Partner and Head of Practice   - Indirect Tax, JSA Advocates & Solicitors, guarantees are issued by the parent company at the behest of lending banks. Therefore, the same should not be viewed as a service to the subsidiary. Guarantees by their basic nature qualify as actionable claims which are neither goods nor services. Hence the same can’t be brought under the GST net.  “As per the commitment to the banks the parent company cannot charge a consideration to the subsidiary. Therefore, the same could not be subject to GST in absence of consideration,” Mishra said. 

Questioning the valuation mechanism of taxable value, Mishra added that transfer pricing assessments are carried out at 0.25-0.30%. Hence, the valuation method of 1% of the lending amount is arbitrary and questionable. “When the statute prescribes the consideration for the service will be the value for taxing purposes, any deviation from the statute by way of a delegated legislation will be a subject matter of constitutional challenge” said Abhishek A Rastogi, founder of Rastogi Chambers. 

“The higher value of 1% may be manifestly arbitrary in several cases, including when the service provider and the service recipient have mutually agreed the consideration for the service”, added Rastogi.