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

Infra firms to approach High Court against GST on Corporate Guarantee

Several real estate and infrastructure companies are set to file writ petitions before various High Courts in the coming days, challenging the 18% Goods and Services Tax imposed on corporate guarantees issued by parent companies to their subsidiaries and related parties to boost lenders’ confidence, sources revealed. 

The move follows as many as 50-60 such companies receiving tax notices after the GST Council’s decision in late October to tax these guarantees. Experts feel the new tax will cause stress in the infrastructure sectors as many firms are heavily dependent on external financing for mega projects. 

The companies, the sources said, will challenge the logic of taxing corporate guarantee as a service being rendered, the sources said. The pleas will also raise questions over the valuation mechanism of taxing such transactions, and, of course, retrospective nature of the current set of notices. 

Confirming that close to five dozen companies including some in power and other infrastructure sectors besides real estate firms have been issued notices seeking tax on corporate guarantees, a government official said the aggregate tax demands raised via these notices might cross Rs 1,000 crore. 

Among the companies that have been slapped the notices are DLF, IL&FS Ltd, Indiabulls Real Estate, and Supertech, the official said, on condition of anonymity. 

One of the companies mentioned above confirmed receiving such notice. “…like many others we too got it (GST notice). We all will move the court…. this notice won’t stand in court,” an official with the company told FE on the condition of anonymity. 

However, when contacted, a Supertech spokesperson, said: “We are not aware of any such notices.” Queries sent to others didn’t elicit any response till press time. 

As per a notification issued by the Central Board of Indirect Taxes and Customs (CBIC) on October 26, GST will apply at a rate of 18% to corporate guarantees between parent and subsidiaries and other related parties. The levy will be either on the financial consideration charged by the guarantor for the service or 1% of the value of the guarantee, whichever is higher. 

The value of such supply of services of corporate guarantee provided between related parties would be governed by the new rule, irrespective of whether full input tax credit is available to the recipient of services or not, the notification added. 

Earlier, the GST Council in its 52nd meeting had also announced that in the case of corporate guarantees issued to a bank by a director against loans sanctioned to a company, and where no fee is paid to the director for that service, no GST would be levied. 

Ankur Gupta, Practice Leader – Indirect Tax at SW India said, “many companies, especially in the energy and real estate sector float a special purpose vehicle for each project. So, for funding purposes, the main entity has to give guarantees to financial institutions to extend the funding to these SPVs.” 

The plea of the industry is that giving guarantee is not a benefit that they are extending to their SPVs but a “necessity” for SPVs to remain operational. Since the SPVs are newly set-up, raising funds becomes a challenge for them, hence the guarantee from Indian holding companies. 

Manish Mishra, Partner, JSA Advocates & Solicitors, said the valuation mechanism of 1% of the lending amount is arbitrary and questionable. He noted that transfer pricing assessments are generally carried out at 0.25-0.30%. Tax experts have also pointed out that since the amendments are prospective and demands anyway should not have been raised for the past periods.