• Notification Date: 08-12-2023
  • Notification No: N/A

Infra Companies to approach courts regarding 18% GST on Corporate Guarantee

A few infrastructure firms are likely to seek legal recourse on the recent decision by the Goods and Services Tax Council to levy 18% GST on corporate guarantees given by holding companies to their subsidiaries. 

According to sources, several large infrastructure companies are set to file writ petitions in the Supreme Court seeking a review of the decision. 

Experts point out that many corporate, especially in the energy and real estate sector, operate through special purpose vehicles for each project. “For funding purpose, the main entity needs to give guarantees to financial institutions to extend the funding to these SPVs. The industry’s plea is that giving guarantee is not a benefit that they are extending to their SPVs but a necessity for SPVs to remain operational. As the accounting and other regulatory requirements require them to maintain separate P&L for each project, therefore, it is feasible for them to have separate entities for each project so that they can meet the legal requirements. Since the entities are newly set up raising funds becomes a challenge for banks hence the guarantee from an Indian holding company is preferred,” said Ankur Gupta, Practice Leader–Indirect Tax, at SW India. 

Valuation is another challenge for the industry as the rate of 1% is quite steep given the market rate is less than 0.5%. “Therefore, defining value specific to this service is arbitrary and beyond the legislative powers of the GST Council,” he said. 

The GST Council in its meeting on October 7 had clarified on the taxability of personal guarantee offered by directors to the bank against the credit limits or loans sanctioned to the company as well as on the taxability of corporate guarantee provided for related persons including corporate guarantee provided by holding company to its subsidiary company. 

It had said that 18% GST would be levied on the parent company’s corporate guarantee for its subsidiary that gets a bank loan. The taxable value of the supply of the guarantee would be taken as 1% of the amount of guarantee offered or the actual consideration, whichever is higher. 

“When service is charged on value, which is more than the actual consideration, paid and agreed mutually between the service recipient and the service provider, the question of manifestly arbitrariness of taxing the higher value will always come into play”, said Abhishek A Rastogi, founder of Rastogi Chambers. He believes that the rules cannot go beyond the statutory provisions. “Once the value of the service is fixed beyond the price paid or payable, the essence of the statutory provisions gets diluted,” he further said.