In a recent development, the Punjab and Haryana High Court has put a hold on a circular issued by the central board of indirect taxes and customs (CBIC) regarding the tax treatment of corporate guarantees between related parties. The circular stated that providing a corporate guarantee without any payment between related companies should be considered a service.
The case is being heard by Justice Sanjeev Prakash Sharma and Justice Sukhvinder Kaur. The petitioner is represented by Senior Advocate Sujit Ghosh along with other advocates, while the Revenue is represented by Advocate Rishabh Kapoor.
“Where the corporate guarantee is provided by a company to the bank/financial institutions for providing credit facilities to the other company, where both the companies are related, the activity is to be treated as a supply of service between related parties as per provisions of Schedule I of CGST Act, even when made without any consideration,” CBIC had clarified in its circular dated October 27, 2023.
According to Abhishek A Rastogi, founder of Rastogi Chambers, who is representing clients at different forums for taxability of corporate guarantee, "the statutory provisions provide that ‘supply’ should be taxable on the value of the consideration and hence the moot point which arises is whether tax on corporate guarantee is valid at the higher amount of 1% and whether this can be taken as a deemed value."
“With respect to the consideration for corporate guarantee, there is also an ambiguity when guarantee is provided for a period beyond one year. The question arises whether 1% deemed value will be subject to tax only once or whether this 1% will be subjected to tax every year, thereby leading to vagueness in tax provisions”, added Rastogi.
This newspaper in April had reported that the Ministry of Finance will likely issue a clarification regarding the taxability of corporate guarantees under the GST law between related parties. 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 also a need for clarity on whether this change should apply prospectively or retrospectively. In October, the GST Council had announced that corporate guarantees for bank loans given by the parent company to its subsidiary would attract 18%.