NEW DELHI: The Goods and Services Tax (GST) Council, Chaired by Finance Minister Nirmala Sitharaman, on Saturday, recommended that the parent company’s corporate guarantee to its subsidiary for a bank loan will attract 18% GST.
However, if a director provides a personal guarantee for a loan from a bank or any financial institution to their own company, no GST will be applicable.
This newspaper was the first to report that the Council will come up with a clarification on this issue.
Revenue Secretary Sanjay Malhotra clarified during a press conference that when a corporate guarantee is given by a director to their company, the value of the service will be deemed as zero, hence no tax will be levied.
This exemption is applicable when no consideration is paid by the company to the director directly or indirectly for providing the personal guarantee to the bank or financial institution. In such cases, the open market value of the transaction or supply will be treated as zero, resulting in no tax liability.
However, the taxable value of the supply of a corporate guarantee provided between related parties, such as a parent company and its subsidiary, will be calculated as 1% of the amount of the guarantee offered or the actual consideration, whichever is higher.
On this, Abhishek A Rastogi, founder of Rastogi Chambers, feels that there could be tax cascading in certain cases and the provisions may be challenged in courts.
“It may lead to absurdity in cases wherein the actual consideration charged is much less than 1% of the guarantee amount. The basic structural framework of GST for valuation of services gets defeated when the services are valued at predetermined percentages, and not on the actual amount of consideration,” said Rastogi.
The Council also recommended an extension of the upper age of the President of the GST Appellate Tribunal (GSTAT) to 70 years from 67 years.