GST on related party corp guarantees: Centre expected to issue clarification

According to sources, the Ministry of Finance is expected to provide clarification regarding the taxability of corporate guarantees under the GST law between related parties. And The debate revolves around the calculation of taxable value based on actual amount utilised by the beneficiary when the guaranteed amount exceeds the utilisation. In addition, there is a call for clarity on whether this change should apply prospectively or retrospectively. In October 2023, the GST Council had announced corporate guarantees for bank loans given by the parent company to its subsidiary would attract 18%.

“Industry representatives have proposed the taxable value should be determined on the amount actually utilised by beneficiary, rather than overall guaranteed sum. For instance, if 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”.

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Moreover, in cases of corporate guarantees between related parties, questions have been raised concerning the deemed valuation methodology, which uses 1% of the guaranteed amount or actual consideration, whichever is higher. In order to determine whether the tax should be applied prospectively or retrospectively, the industry was looking for clarification.

Moreover, differences have emerged concerning the applicability of deemed valuation, independent of the recipient’s access to input tax credit (ITC). Critics contend that this feature goes against the intent of the law because taxpayers shouldn’t be burdened unduly by the valuation process in situations where there is no loss or where the government is not losing money.

Stakeholders are also advocating for issuance of a circular reaffirming the deemed valuation mechanism for corporate guarantees under GST is a one time levy

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