• Notification Date: 28-12-2023
• Notification No: N/A

GST on Corporate Guarantee: Realtors appeal for Revision

Real estate developers have made representation before Finance Minister Nirmala Sitharaman to make amends in the recent circular of imposing 18% GST on corporate guarantees given by related parties, as per government sources.   

“As per developers, 18% GST should be imposed on either actual consideration or 1% of the guaranteed amount, whichever is lower,” a highly placed source said. Notably, as per the circular, the consideration value on which the GST will be levied is higher of either the actual payout or 1% of the loan amount. 

Besides realty developers, other industry bodies are also in the process of making representation before the government in respect of recent ruling. “Currently the courts are on vacations. We will file the writ petition in the first or second week of January,” another source said.  

Meanwhile, as per government sources, the next GST Council meet may take up the above issue for discussion. The 53rd Council meeting will likely take place in January. According to experts, the recent ruling by the Council will have a significant impact on the infrastructure and real estate sector, which heavily relies on external financing and borrowing for large-scale projects. 

The new rule states that the taxable value of corporate guarantees will be either 1% of the guarantee amount or the actual consideration paid for providing the corporate guarantee, whichever is higher. This means that GST will be applicable on guarantees between related parties, even if the subsidiary company cannot claim full input tax credit. The proposed rule determines the value for taxation purposes based on this valuation.  

Manish Mishra, Partner and Head of Practice - Indirect Tax at JSA Advocates & Solicitors, had earlier told this newspaper that guarantees issued by the parent company on behalf of lending banks should not be considered a service to the subsidiary. He argued that guarantees, being actionable claims, do not fall under the category of goods or services and should not be subject to GST.  

Mishra pointed out that the parent company cannot charge a consideration to the subsidiary due to the commitment made to the banks, which further supports the argument against GST imposition in the absence of consideration.  

Ruling to impact Infra, Real Estate Sector 
According to experts, the recent ruling by the Council will have a significant impact on the infrastructure and real estate sector, which heavily relies on external financing and borrowing for large-scale projects. Realtors may file writ petition in the first or second week of January. 

“The arbitrariness with respect to valuation of a service will come into play once, the delegated legislation intends to tax the service at a value which is more than the actual consideration”, said Abhishek A Rastogi, founder of Rastogi Chambers, who feels that article 14 test may happen in such a situation. 

“Charging tax at a higher value of 1% will defeat certain statutory provisions and will be against the principles and objectives of GST”, added Mr Rastogi.