In the intricate realm of taxation, the application of Goods and Services Tax (GST) on corporate guarantees has sparked significant debate and scrutiny. This analysis delves into the complex landscape surrounding the taxation of these transactions under GST, considering evolving legislative provisions and judicial interpretations.
Consideration in GST Applicability: A Historical Perspective & Recent Circular
In the past, when we had the Service Tax system, if there was no consideration (payment involved), the transaction was not taxed. But when GST came into play, Schedule 1 of the CGST Act, 2017, changed things. This part considers certain transactions as supplies, even if there’s no payment involved, as long as it’s done in the course or furtherance of business, especially between related or distinct persons.
The discussion stems from Circular No. 34/8/2018-GST, where the service provided by Central or State Governments, guaranteeing loans from financial institutions to business entities, is deemed taxable under GST. This circular set the stage for the inclusion of such services within the GST ambit.
Challenges in Valuing Supplies & Possible Resolutions
The conundrum arises in determining the value of such supplies, given the lack of clear guidance from the GST department. The recent developments discussed in the press release of the 52nd GST Council Meeting in 2023 shed light on potential resolutions.
The press release proposes two measures to address the GST on corporate guarantees. Firstly, a circular may be issued, clarifying that when no consideration is paid by the company to the director for providing a personal guarantee, the open market value may be treated as zero, exempting it from tax. Secondly, sub-rule (2) in Rule 28 of CGST Rules, 2017, could be inserted, providing for a taxable value of supply of corporate guarantees between related parties (defined at the end) as one percent of the guaranteed amount offered, or the actual consideration, whichever is higher.
GST Guidelines for Corporate Guarantees
Corporate guarantees extended to related parties are subject to an 18% GST on either 1% of the guaranteed amount or the actual consideration, whichever is higher. Conversely, personal guarantees by directors are only taxable if there’s consideration involved. These distinctions underscore the GST applicability on corporate and personal guarantees.
Conclusion: Evolving Landscape and Future Clarity
In conclusion, the landscape surrounding the taxation of corporate guarantees under GST is evolving. The intricacies of consideration, related-party transactions, and proposed guidelines necessitate a nuanced understanding for both businesses and regulatory authorities. As developments unfold, clarity is expected to
Who are considered related party under GST?
Explanation to Section 15 of the Central GST Act explains that:
- persons shall be deemed to be “related persons” if
- such persons are officers or directors of one another’s businesses;
- such persons are legally recognised partners in business;
- such persons are employer and employee; any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them; one of them directly or indirectly controls the other;
- both of them are directly or indirectly controlled by a third person;
- together they directly or indirectly control a third person; or
- they are members of the same family;
- the term “person” also includes legal persons;
- persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related. Therefore holding and subsidiary, associates, fellow subsidiaries shall be taken to be related persons.