The Punjab & Haryana High court on Friday stayed a circular on taxability of corporate guarantee between related-persons, taking loans from banks or financial institutions.
Experts say this ruling will give relief to industry benefiting from tax exemptions. Such industry includes but is not limited to petroleum, alcohol, real estate, healthcare, financial services, public transportation, and education. Apprehension was that such a mechanism could result in an inescapable and significant financial encumbrance,
On October 7 year last year, the GST Council had recommended 18 per cent tax on parent company’s guarantee to subsidiary. However, director’s personal guarantee was excluded. Later it was notified and a circular was issued. While the first part of the circular is related with personal guarantee given by the director, its second part deals with the parent company’s corporate guarantee to its subsidiary for a bank loan. Second part of the circular was challenged in the High Court and now it has been stayed.
GST mechanism
The notification and related circular provided that the GST mechanism for corporate guarantee will have a prospective effect. Calculated as per the mechanism explained in the notification, if the corporate guarantee were ?100 crore, then ?18 lakh would be the GST liability.
Commenting on the ruling, Sandeep Sehgal, Partner with AKM Global said the decision to stay the CBIC Circular on corporate guarantees emphasizes the complexities and the pressing need for clarity within the GST framework. The taxation of corporate guarantees, particularly those without consideration, presents significant valuation challenges.
“Despite recent amendments to valuation rules, these do not seem conducive to ease of doing business, given that different laws could propose varied arm’s length prices for the same transactions. The court should take cognizance of the issues, which may ultimately lead to rationalisation of the provision,” he said.
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