• Notification Date: 11-04-2024
• Notification No: N/A

GST on Related Party Corp Guarantees: Centre Expected to Issue Clarification

The Ministry of Finance is likely to issue clarification regarding the taxability of corporate guarantees under the GST law between related parties, according to sources in the know. 

The debate revolves around the calculation of taxable value based on actual amount utilised by the beneficiary when the guaranteed amount exceeds the utilisation. In addition, there is a call for clarity on whether this change should apply prospectively or retrospectively. In October, the GST Council had announced corporate guarantees for bank loans given by the parent company to its subsidiary would attract 18%. 

“Industry representatives have proposed the taxable value should be determined on the amount utilised by beneficiary, rather than overall guaranteed sum. For instance, if parent company guarantees a limit of Rs 1 crore, but only Rs 40 lakh have been utilised, proponents argue the taxable value should be 1% of the utilised amount, in this case, Rs 40,000,” a top government source said. 

Besides, concerns have been raised about deemed valuation methodology of 1% of guaranteed amount or actual consideration, whichever is higher, in cases of corporate guarantees between related parties. The industry has sought for clarification whether the tax should be applied retrospectively or prospectively. 

“Furthermore, discrepancies have surfaced regarding the applicability of deemed valuation irrespective of input tax credit (ITC) availability to the recipient. Critics argue this aspect contradicts the intention of law, as the valuation mechanism should not impose undue burdens on taxpayers where there is no loss or when situation is revenue-neutral for government. 

Stakeholders are also advocating for issuance of a circular reaffirming the deemed valuation mechanism for corporate guarantees under GST is a one-time levy. 

Valuation Methodology: 

Concerns raised about deemed valuation methodology of 1% of guaranteed amount or actual consideration, whichever is higher, in cases of corporate guarantees between related parties