Finance Ministry’s latest move imposes 18% GST on corporate guarantees for bank loans by parent companies to subsidiaries. Learn about key changes, including the taxable value calculation and exceptions for Director-issued guarantees. Stay informed on GST Council recommendations and the impact on businesses.
Introduction: In a significant development, the Finance Ministry has notified an 18% GST on corporate guarantees provided by parent companies to subsidiaries for bank loans. This move, in line with GST Council recommendations, introduces changes through the insertion of a new sub-rule (2) in Rule 28 of the CGST Rules, 2017.
As recommended by the GST Council on October 7, the parent company’s corporate guarantee to its subsidiary for a bank loan will attract 18% GST.
Now, to make recommended amendments ministry notifies and inserted a new sub-rule (2) in Rule 28 of the CGST Rules, 2017 through Notification No. 52/2023 – Central Tax dated 26.10.2023 to provide taxable value of supply of corporate guarantee to any banking company or financial institution as Higher of followings;
- 1% of the amount of such guarantee, or
- Actual consideration
Earlier, the GST Council in its 52nd meeting had also announced that in the case of corporate guarantees issued to a bank by a Director against loans sanctioned to a company, and where no fee is paid to the director for that service, no GST would be levied.
Further, it is also provided that these changes shall come into force from the date of their publication on Official Gazette.
As per section 22(1), every supplier shall be liable to be registered under GST in the State/Union territory from where he makes a taxable supply of goods or services or both, if the aggregate turnover in a financial year exceeds Rs. 20 lakhs. However, this limit is applicable only in case of states other than the special category states. (Limit for special category states is Rs. 10 lakhs.)
Now, suppose one of the group companies was not required to obtain GST registration earlier as its turnover was not exceeding the limits as specified in section 22 and it has provided or willing to provide guarantee on behalf of it another group company. Then it has to obtain GST registration if the Taxable value exceeds the specified limits due to these transactions. To understand this, let’s take an example:
M/s Navya ltd. engaged in business of providing infrastructures consulting services and following data is extracted from its book of accounts:
| Sl. No. | Transactions | Receipts |
| 1. | Sale of Services (Taxable) | 8,50,000 |
| 2. | Sale (Exempted) | 3,25,000 |
M/s Navya ltd has provided guarantee to the bank on Behalf of M/s Jyotesh Ltd. (Related Person) amounting to Rs. 12 Crores.
Scenario 1: Prior to this amendment:
M/s Navya ltd. is not liable to obtain GST registration since its aggregate total turnover is Rs. 11,75,000/- which is lower than the limit of Rs. 20 lakhs.
Scenario 2: After this amendment:
In the lights of above mentioned amendments, the taxable value for activity of providing corporate guarantee to related parties will be 12 lakhs (i.e. 1% of 12 crores). Now, the aggregate turnover comes as 23.75 lakhs, Hence, M/s Navya ltd is mandatorily required to obtain GST registration.
Conclusion: This Finance Ministry notification underscores the evolving nature of GST regulations and their impact on corporate financial transactions. Businesses must stay abreast of such changes to ensure compliance and make informed decisions regarding GST registration based on the amended rules for corporate guarantees. The move towards a standardized approach in taxation is aimed at enhancing transparency and simplifying the taxation landscape for businesses involved in such financial dealings.
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