Introduction:
Taxation of corporate guarantees issued by related parties without consideration is currently a major concern for many companies. The Directorate General of Goods and Services Tax Intelligence (DGGI) and audit teams have been issuing notices to companies, claiming GST liability for these corporate guarantees given to related parties. In this article, we will discuss the Supreme Court’s ruling, legal provisions, and the need for government clarification on the GST implications of such guarantees.
Analysis:
The Supreme Court, in the case of COMMR. OF CGST AND CE v. EDELWEISS FINANCIAL SERVICES LIMITED, upheld that the issuance of corporate guarantees to group companies without consideration does not fall within the purview of banking and other financial services and is therefore not a taxable service.
It is important to note that for a transaction to fall under Paragraph 2 of Schedule I of the CGST Act, there must be a supply of goods or services. Inter-corporate guarantees can be argued as either transactions involving money, which fall outside the scope of GST, or contractual claims that do not constitute a supply of goods or services under Paragraph 6 of Schedule III.
However, under GST, a divergent view can be taken. As per Section 7(1)(c), activities specified in Schedule I, made or agreed to be made without consideration, are considered within the scope of the term ‘supply.’ This includes the supply of goods or services, or both, between related or distinct persons as specified in Section 25, when made in the course or furtherance of business.
Moreover, Circular No. 154/10/2021- GST dated 17.06.2021 clarified that services related to the guaranteeing of loans by the Central or State Government for their undertakings or public sector undertakings (PSUs) are specifically exempted as per Notification 12/2017 (rate) dated 28.06.17. This raises the issue that only services related to guaranteeing loans taken by such undertakings or PSUs from banking companies and financial institutions are exempt, while all other similar services would be taxable under GST law.
Now, let’s explore the key issues:
i. Is a corporate guarantee issued to a related party considered a supply under GST?
ii. Is Reverse Charge Mechanism (RCM) applicable to guarantees given by directors to the company? If so, does it apply to whole-time directors, non-executive directors, or independent directors?
iii. Does RCM apply when a director gives a guarantee to a subsidiary company?
iv. If a company decides to pay RCM for a previous period (e.g., 2017-18 onwards), can Input Tax Credit (ITC) be claimed considering the time limit under Rule 16(4)?
v. If RCM liability is paid for a guarantee issued by a director’s Head Office (HO), should the GST amount be cross-charged to other plants?
vi. Is a corporate guarantee given by a foreign company to an Indian company treated as an import of service?
vii. Is a corporate guarantee given by an Indian company to a foreign company treated as an export of service under Section 2(6) of the IGST Act?
vii. What should be the valuation methodology for such corporate guarantees?
Conclusion:
Given the complexities surrounding the taxation of corporate guarantees issued to related parties without consideration, there is a crucial need for government clarification. The Supreme Court’s ruling and the divergent views on whether these guarantees fall within the scope of GST highlight the uncertainty faced by companies. Clear guidelines are required to determine the applicability of Reverse Charge Mechanism, the treatment of guarantees given by directors to subsidiary companies, the availability of Input Tax Credit, and the valuation of corporate guarantees. To provide certainty and ensure compliance, it is advisable for the government to issue clarifications on the taxation of corporate guarantees issued to related parties.
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