GST on Corporate Guarantee-clarified

By -

In a recent circular, Circular No. 204/16/2023-GST, dated 27-10-2023 following clarifications have been provided in respect of GST on Corporate Guarantee.


A. Taxability of personal guarantee by directors:

Directors / promoters / employees and the Company are 'related persons' as per the explanation to Section 15 of the Central Goods and Services Tax Act, 2017. 


The circular clarifies that personal guarantees offered by promoters, directors, managerial staff, etc. of borrowing company would be treated as taxable supplies, even if made without consideration, if it is in the course or furtherance of business.

In case personal guarantee is provided without any consideration, the value of taxable supply would be determined under Rule 28 of CGST Rules 2017 which provides for determination of the 'Open Market Value'. 

The Circular No. RBI/2021-22/121 dated 9 November 2021 issued by The Reserve Bank of India, prohibits earning of income from such guarantees. Therefore, the circular clarifies that the taxable value for such provision of personal guarantee provided by under Rule 28 of the CGST Rules would also be zero.

Hence, no GST would be payable on such supplies.

In cases where specific consideration / remuneration is provided for such guarantee, GST would apply on such consideration.


B. Taxability of corporate guarantee by group companies:

Any transaction between related / group / holding and subsidiary companies is treated as provision of taxable supply in accordance with Section 7 read with Schedule I of CGST Act, even if it is made without any consideration and is made in the course or furtherance of business.

It is clarified that where the corporate guarantee is provided by a related / group / holding company for a borrowing company to the bank / financial institutions for securing credit facilities for its group / subsidiary company, it is regarded as taxable supply under GST even when made without any consideration.

As per Notification No. 52/2023-CT dated 26 October 2023, the value of services provided by a supplier to a related person, involving the provision of a corporate guarantee to a banking company or financial institution on his behalf, is deemed to be 1% (one percent) of the guaranteed amount offered, or the actual consideration, whichever is higher.

Well.....


Historically Valuation of corporate guarantees for transfer pricing even under Income Tax laws has been a contentious issue. 

The Bombay High Court, in the cases of Everest Kento Cylinders Ltd and Manugraph India Ltd has ruled that a Corporate Guarantee fee of 0.50% can be considered to be at arm's length.

Conversely, the Madras High Court in the case of Redington (India) Ltd, has determined that a Corporate Guarantee fee of 0.85% to be at arm's length. 

However, Rule 10TD of the Income-tax Rules, 1962, sets the *safe harbour rate for this fee at 1% of the guaranteed amount.

CBIC circular does not make any reference to Rule 10TD of the Income-tax Rules, 1962. As a result, the valuation of Corporate Guarantees extended to government entities or private individuals may be subject to Assessment on discretion and may not put the issue to rest.


R.SRIVATSAN

NACIN, Chennai

Comments

Post a Comment

Popular posts from this blog

Mismatches between GSTR 2A vs 3B- Things to be considered before you respond to GST Notices

By -
Image
  Among the discrepancies for which notices are issued by department, mismatches between GSTR 2A vs 3B tops it all. Objective of this blog is to highlight aspects that are relevant while responding to the GST Notices especially for FY 2017-18 & 2018-19. Deadline to issue the order under sec 73(10) for FY 2018-19 is 30th April 2024, thus department is rushing orders in their favor, if you fail to highlight appropriate aspects in your reply to notices issued under sec 73/74. Introduction and relevance of GSTR 2A:   The FORM GSTR 2A was not established with a defined purpose for financial years 2017-18 and 2018-19.  Provision in respect of limit of ITC on basis of GSTR-2A was introduced only on 9-10-2019, but system was not fully established for some time.   Hence, for the financial years 2017-18 and 2018-19, insistence of matching of GSTR-2A and Input Tax Credit availed by recipient was not legitimized.  Provisions applicable from 9-10-2019 till 1-1-2022:   The ITC availed by recipie
Read more

Renting of residential dwelling unit to a registered person

By -
Image
The irony is quite recently in the month of May 2022,  The Authority for Advance Ruling, Maharashtra in case of  M/S. KASTURI & SONS LTD, AAR held that GST applicability is not decided by the nature of the property but by the purpose for which it is used. Thus, GST exemption is allowed to applicant. You can read our earlier blog by clicking this hyperlink  further.  The ruling given by the West Bengal Authority for Advance Ruling, Goods and Services Tax, in the case of IN RE: M/S. BORBHETA ESTATE PVT. LTD was referred in the above ruling that the Applicant's service of renting/leasing out the dwelling units for residential purpose was, exempt under Si No. 12 of the Exemption Notification No. 12/2017-CT (Rate) dated 28.06.2017, as amended from time to time and the Applicant, therefore, was not liable to pay tax on supply of such service. That said effective 18th July 2022, the following amendments were made to effect GST on rental income derived from residential units when rente
Read more

No Service Tax on take away from restaurants

By -
Image
Takeaway food from the restaurent counters will not to attract service tax, CESTAT (Customs, Excise & Service Tax Appellate Tribunal) bench of New Delhi  has ruled in the matter of Haldiram.  CESTAT in its ruling delivered last week opined that:  “It has to be held that no service tax can be levied on the activity of takeaway of food items as it would amount to sale and would not involve any element of service.” Delhi-based Haldiram Marketing is engaged in running food outlets where customers can either purchase packaged foods such as sweets or namkeen, or avail of restaurant dining facilities.  Additionally, the appellant also provides the facility of ‘takeaway’ of food items. The bench took the reference from an order passed by the Commissioner (Appeals) in the matter of Anjappar Chettinad (2019) and noted that it was accepted by the tax department. That order had said: “In the appellant’s case the activity neither falls under restaurant service as the food is not consumed in the
Read more