52nd GST Council mulls tax on corporate and personal guarantees, valuation crucial

Industry feels that there are a lot of issues which the council should clarify with this proposal. A CFO of a leading conglomerate on the condition of anonymity said, "The issue on corporate guarantee is that no consideration is usually charged on such transactions by one company to another company in the same group or under the same management.

It is understood that the GST law prescribes open market value as the basis where no consideration is mentioned. In such cases it’s not possible to determine such an open market value, hence in some cases, resort has been taken to the charges levied by banks for issue of bank guarantees, which range between 0.5 percent and 3 percent. So, 18 percent of this consideration will be huge."

Experts said this proposal would actually be a negative for sectors such as infrastructure, renewable energy, construction, real estate, etc.

Saurabh Agarwal, tax partner at EY, said, "The taxation of corporate guarantees has been a contentious issue since the service tax era. The Supreme Court (SC) held in the case of Commissioner of CGST & Central Excise vs Edelweiss Financial Services Ltd that corporate guarantees provided without consideration are not taxable under service tax. However, the situation under GST is less clear due to differences in the wording of the two legislations."

"If the GST Council recommends the levy of GST on corporate guarantees, it is important to explicitly provide for the valuation of such transactions in order to avoid future disputes. This is because the open market value for such transactions is often a matter of dispute between tax authorities and taxpayers.

For example, different banks charge different rates of bank guarantee commission, starting from 0.3 percent to 3 percent of the guarantee value, depending on multiple factors such as the creditworthiness, relationship with the customer, etc.," he added.

Expressing similar sentiments MS Mani, Partner, Deloitte India, said, "It will be essential to resolve the taxability issues on corporate guarantees by clarifying that there would be no presumptive value attributed to such transactions so that it doesn't become difficult for the industry."

Similarly, Pratik Jain, Partner at 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 charge because the risks and circumstances are entirely different in most cases. The GST council should ideally engage with industry a bit more before issuing a clarification or making any changes in the law."

Abhishek Jain, national head and partner, indirect taxes, KPMG said, "Taxability of corporate and personal guarantees between related entities has been a matter of debate since the inception of GST with varied positions being followed.

Various industry players were not paying GST on the premise that the said is linked to their own equity and guarantee per se would be akin to a service to themself and hence, GST should not apply. Arguments like these being stewardship function, no administrative machinery to value such supplies as they said would depend on credit worthiness, etc. were also explored."

"No tax position was majorly by sectors which have exempt/ non-taxable supplies, as for them GST on such corporate guarantee would entirely/ partially become a cost. Clarity on taxability and specifically valuation for this issue should help settle this long-drawn debate under GST, it would be interesting to see the valuation mechanism — this essentially because guarantee fees are a factor of various subjective aspects like credit worthiness, amount of loan, past experience, etc. and hence, valuing such related party transactions at a deemed value may place them on a different footing qua unrelated party transactions. Also, if a clarification on these being taxable is issued, the industry would also look forward to specific relief/ regularisation for the past period," he added.