HC stays circular on taxing corporate guarantee between related persons
The Punjab & Haryana High court on Friday stayed a circular on taxability of corporate guarantee between related persons, taking loans from banks or financial institutions.
Experts say this ruling will give relief to an industry benefiting from tax exemptions. Such an industry includes but is not limited to petroleum, alcohol, real estate, healthcare, financial services, public transportation and education. The apprehension was that such a mechanism could result in an inescapable and significant financial encumbrance,
On October 7 last year, the GST Council recommended 18 per cent tax on a parent company’s guarantee to subsidiary. However, director’s personal guarantee was excluded. Later, it was notified and a circular was issued. While the first part of the circular relates to the personal guarantee given by the director, the second part deals with the parent company’s corporate guarantee to its subsidiary for a bank loan. The second part of the circular was challenged in the High Court and now it has been stayed.
GST MECHANISM
The notification and related circular provided that the GST mechanism for corporate guarantee will have a prospective eect. Calculated as per the mechanism explained in the notification, if the corporate guarantee were ₹100 crore, then ₹18 lakh would be the GST liability.
Commenting on the ruling, Sandeep Sehgal, Partner with AKM Global said the decision to stay the CBIC circular on corporate guarantees emphasises the complexities and the pressing need for clarity within the GST framework. The taxation of corporate guarantees, particularly those without consideration, presents significant valuation challenges.
“Despite recent amendments to valuation rules, these do not seem conducive to ease of doing business, given that dierent laws could propose varied arm’s length prices for the same transactions. The court should take cognizance of the issues, which may ultimately lead to rationalisation of the provision,” he said.