GST on corporate guarantees -- answers to five key questions

At its next meeting on October 7, the GST council is likely to consider a proposal to levy an 18% GST on corporate guarantees extended by holding companies to their subsidiaries.

MS Mani, GST Partner at Deloitte India, and Pratik Jain, Partner at Price Waterhouse Coopers (PwC), provided valuable insights into corporate guarantees during an interview with CNBC-TV18.

Mani believes if there is no commercial value to a transaction occurring between two connected entities, there should be no GST implication.

Jain feels if the government deems it necessary to impose taxes on this matter, then a) the taxation should be applied to future instances, in his opinion, and there should be an exemption granted for previous periods, and b) it cannot be equated to bank guarantees because bank guarantees involve distinct concepts, including the presence of underlying assets and security measures, among other factors.

"A group company gives a guarantee to its smaller company or someone who needs that guarantee, largely because it's part of the same group," Mani said.

“Under GST even if it is a free-of-cost transaction between related parties, it is liable to GST, at 18% in this case. The issue is wherever credit is available, not a problem, but typically corporate guarantees are issued in large infrastructure projects like power construction and so on, where credit is not available because there is no output tax there in many cases. And hence, this 18% becomes a cost,” Jain said.

“...because I am a holding company, I am giving a corporate guarantee on behalf of my subsidiary. Now, is it my shareholders' function and hence not to be taxed or is it a service, which I am providing to the subsidy? That is a debate,” he added.  

“If it is felt that there is a need for a GST, then I would say that similar to the provisions that we have for transfer pricing and income tax, under the Safe Harbour rules, we should have some kind of a presumptive tax over here it can be on 0.5% or 1% or 0.1%, which is treated to be the value and on that value a GST is levied,” Mani said.

Presumptive taxation is a simplified taxation scheme designed to ease the compliance burden for certain eligible businesses. Under this arrangement, taxpayers are considered to have earned a certain percentage of their gross receipts as income, and taxed accordingly. This eliminates the need to maintain regular books of accounts or undergo a detailed audit.

“If there is a need it should be done in a calibrated manner so that there is no credit leakage at any point of time. It's a fairly large issue because most of the corporates keep issuing guarantees to their subsidiaries, smaller companies, and companies which don't have a very strong balance sheet etc. And it's part of a normal business transaction,” Mani said.

“If I have a large organisation and a small organisation, it's my business decision that my large organisation gives a guarantee to the small organisation or to an external third party. And as long as I don't charge for it, to me there is no GST play in this, but if there is a need for a GST play felt perceived by the policymakers, it should be very clear on what value it is to be levied,” he pointed out.

“The question is not an 18% being levied. The question is, should it be levied on a presumptive basis because in most cases, there is no amount of charge between the two parties? So, when there is no commercial transaction between the two entities, how can a GST be levied because GST is levied on the value? So, here there is no open market value also, which is available. So, ideally, there should be no GST on this,” Mani said.

Continuing on his point of fixing a presumptive tax to arrive at a value to impose the GST on, Mani said, “This will inevitably lead to situations where the recipient entity is unable to take credit either because it is exempted, or it is an NBFC or any other reason. So, either it is not able to take the credit, or the credit is restricted which will lead to a credit loss and that is the reason ideally in respect of corporate guarantees there should be no GST because there is no commercial value to the transaction.”

“Notices have been issued to a lot of companies already, it is an issue which has come after GST has come in because, before GST, service tax was there where free of cost tractions were not liable,” Jain said.

“We have seen GST audits for the period starting from 2017 and in many of these audits the issue in respect of corporate guarantees issued by a large company to its subsidiary or to one of the group companies,” Mani said.

“These are part of the audits; audits go through certain cycles, so there is a pre-consultation notice which is issued and then there is a final notice that is issued. So, this is already figuring in many of the pre-consultation notices,” Mani added.

For the entire discussion, watch the accompanying video