📢 GST on Related Party Corporate Guarantees: Awaiting Clarification

📢 GST on Related Party Corporate Guarantees: Awaiting Clarification The Ministry of Finance is expected to issue a clarification on the taxability of corporate guarantees under the GST law between related parties. Here are the key points:

The debate is around the calculation of taxable value based on the actual amount utilised by the beneficiary when the guaranteed amount exceeds the utilisation.

There is a call for clarity on whether this change should apply prospectively or retrospectively. In October, the GST Council announced that corporate guarantees for bank loans given by the parent company to its subsidiary would attract 18% GST.

Industry representatives have proposed that the taxable value should be determined on the amount actually utilised by the beneficiary, rather than the overall guaranteed sum.

For instance, if a parent company guarantees a limit of Rs 1 crore, but only Rs 40 lakh have been utilised, proponents argue the taxable value should be 1% of the utilised amount, in this case, Rs 40,000.

Concerns have been raised about the deemed valuation methodology of 1% of the guaranteed amount or actual consideration, whichever is higher, in cases of corporate guarantees between related parties.

The industry has sought clarification on whether the tax should be applied retrospectively or prospectively. Discrepancies have surfaced regarding the applicability of deemed valuation irrespective of input tax credit (ITC) availability to the recipient.

Critics argue this aspect contradicts the intention of law, as the valuation mechanism should not impose undue burdens on taxpayers where there is no loss or when the situation is revenue-neutral for the government.

Stakeholders are also advocating for the issuance of a circular reaffirming the deemed valuation mechanism for corporate guarantees under GST is a one-time levy. Let’s discuss how these changes could impact your business. #GST #CorporateGuarantees #TaxLaw