GST Clarifications for Corporate & Director Guarantees: 52nd GST Council Meeting

Introduction: The 52nd GST Council Meeting, held on October 7, 2023, addressed several important issues, and one of the major concerns raised by industries was the applicability of Goods and Services Tax (GST) on Corporate Guarantees and Director’s Guarantees. In this meeting, important clarifications were provided regarding the GST treatment of these financial instruments, providing much-needed clarity for businesses.

Clarifications on GST on Corporate Guarantees:

1. Corporate Guarantee Provided by Corporates to Their Subsidiaries: The GST Council clarified that Corporate Guarantees provided by corporates to their subsidiaries will attract GST. The valuation for GST purposes will be based on either of the following, whichever is higher:

• A deemed value of 1% of the Guarantee provided.
• The actual consideration declared in the Guarantee.

Importantly, this GST liability exists irrespective of Input Tax Credit (ITC) eligibility at the recipient’s end. This clarification aims to ensure that GST is applied to Corporate Guarantees effectively.

Clarifications on GST on Director’s Guarantees:

2. Director’s Guarantee: The GST Council has determined that Director’s Guarantees shall not attract GST if the company providing the guarantee is not remitting any consideration to the director. This implies that if there is no financial transaction or payment from the company to the director in exchange for the guarantee, GST will not be applicable on Director’s Guarantees.

Impact on Industries:

These clarifications have significant implications for industries, particularly in the context of Corporate Guarantees. Under the GST Council’s decision, Corporate Guarantees will be subject to GST at a minimum valuation of 1%, which could result in higher expenses for businesses. Additionally, this may lead to an accumulation of Input Tax Credit (ITC) for the recipients of such guarantees.

It’s worth noting that under the previous regime of Service Tax, the Hon’ble Supreme Court had ruled that the issuance of a Corporate Guarantee in favor of a subsidiary company did not attract service tax in the absence of any consideration. This GST Council meeting clarifies the GST treatment of Corporate Guarantees, providing businesses with a clear framework for compliance.

Conclusion:

The 52nd GST Council Meeting held on October 7, 2023, addressed the long-standing concerns of industries regarding the applicability of GST on Corporate Guarantees and Director’s Guarantees. The clarifications provided in this meeting establish the GST treatment for these financial instruments, ensuring that they are appropriately taxed based on their value or consideration.

While the decision to impose GST on Corporate Guarantees may result in higher costs for businesses, it also brings clarity to the GST framework. The exemption of GST on Director’s Guarantees when no consideration is involved provides relief in such scenarios.

These clarifications enable businesses to align their financial operations with the GST regulations, ensuring compliance and reducing uncertainty in the treatment of Corporate and Director’s Guarantees under the GST regime.