GST Council likely to levy 18% GST on loans secured via corporate guarantees: Sources

"For ease in valuation council likely to consider bank commission as standard basis to calculate GST liability," sources said.

It was in 2018 when these two scenarios were clarified for 18 percent GST in case of PSUs and now the council is likely to clarify the same for all, that is all industries, and not just PSUs.

Pratik Jain, Partner and National Leader for Indirect Tax in PwC said, "There has been a debate whether providing 'corporate guarantee' is a service or a shareholder's function. It's not too much of an issue if input credit is available to the recipient. However, in many cases, corporate guarantees are issued in sectors such as power, construction, real estate etc., where credit is not available. Further, there is an issue of valuation. Ideally, the valuation should not be similar to a bank charges because the risks and circumstances are entirely different in most cases. GST council should ideally engage with industry a bit more before issuing a clarification or making any changes in the law."

Tax experts who did not wish to be quoted said that this move could be a big negative for the industry as it will increase the cost incurred by companies to secure loans.

"As per Rule 28 of the CGST Rules, 2017, the value of supply shall be open market value (OMV), if available. Else, it shall be the value of supply of goods or services of like kind and quality. OMV may not be ascertainable for corporate guarantee. Banks charge a particular percentage (as a commission) of the amount of Bank guarantee issued; percentage of commission used for Bank guarantee purposes could possibly  be used for valuation of corporate guarantee. Apparently DGGI has already issued notices to corporate houses on the issue of GST on corporate guarantee and this this clarity would trouble industry."