Companies Mull Writ Petitions Over GST on Corporate Guarantees

Last updated: 07 December 2023

Corporate Heavyweights Contemplate Legal Challenge Against GST Council's 18% Tax on Corporate Guarantees

In a significant development, several major corporate entities are gearing up to challenge the recent decision by the GST Council, which imposes an 18% Goods and Services Tax (GST) on corporate guarantees provided by holding companies to their subsidiaries. Individuals familiar with the matter, requesting anonymity, revealed that these corporate giants are planning to file writ petitions before high courts to contest the controversial ruling.

Industry experts anticipate that the GST Council's decision could disproportionately impact the infrastructure sector, heavily reliant on external financing and borrowing for large-scale projects. The new rule specifies that the taxable value of corporate guarantees will be either 1% of the guarantee amount or the actual consideration paid for providing the guarantee, whichever is higher. This valuation will be applicable, even if the subsidiary company is unable to claim full input tax credit, leading to the imposition of GST on guarantees between related parties.

 

A seasoned expert argued that corporate guarantees, issued at the request of lending banks, should not be considered a service to the subsidiary. These guarantees, by their fundamental nature, qualify as actionable claims, falling outside the scope of goods or services. The expert emphasized that, given the commitment to the banks, the parent company cannot charge consideration to the subsidiary, making it exempt from GST in the absence of consideration.

Criticism extends to the valuation mechanism of the taxable value, with experts pointing out that transfer pricing assessments typically occur at 0.25-0.30%. They find the 1% valuation method arbitrary and questionable, raising concerns about potential constitutional challenges for deviating from statutory considerations for taxing purposes.

Highlighting the potential arbitrariness of the higher 1% value, experts noted that in cases where the service provider and the recipient mutually agree on the consideration for the service, such a valuation may be manifestly arbitrary. The looming legal challenge underscores the industry's dissatisfaction with the GST Council's decision and the need for a comprehensive reevaluation of the taxation framework for corporate guarantees.



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