NEW DELHI: India Inc will be liable to goods and services tax, applicable from October 2023, on intra-group corporate guarantees that will be 1% per annum of the value of the loan guaranteed, according to a notification that brings into effect the provision approved by the GST Council.
There was confusion as to whether GST would apply one-time for the entire period of guarantee, or every year, and the latest notification brings clarity on the issue.
The matter was referred again to the GST Council after a large number of real estate and infra companies challenged the October 23 circular from government which said 18% GST will be applicable on corporate guarantee. These companies were slapped with tax notices worth ₹1,000 crore, demanding tax from 2017. The government Thursday notified decisions taken by the GST Council at its 53rd meeting including imposition of a cap of ₹25,000 on fee for filing appeal in the GST Appellate tribunal and enabling provisions for allowing rectification of monthly and quarterly GST return to put an end to disputes on routine reconciliation between GSTR-1 and GSTR-3B businesses. The Centre also allowed manual filing of appeals in GST Appellate Tribunal with the Registrar’s permission to help in situations where the online portal is not accessible. Additionally, a minimum filing fee of ₹5,000 has been set, bringing clarity and structure to the appeals process. “This is a positive step, offering flexibility for exceptional circumstances while also establishing a clear financial threshold for appeals,” said Saurabh Agarwal, tax partner, EY.
GST at the rate of 18% would be applicable on 1% per annum of the value of the loan guaranteed. As per the notification, invoice value would be accepted as the taxable value for the service of corporate guarantee between related entities where the recipient is eligible for full input tax credit.
Experts term the notification as a mixed bag. “This comes as a big relief for businesses, who in various cases, were anticipating possible cash flow concerns on the said issue,” said Abhishek Jain, indirect tax head & partner, KPMG says.
And though the GST council has fixed the tax treatment of corporate guarantees, the relief will be limited to a few sectors. For instance, the notification says companies claiming full tax credit on purchases won’t be taxed on guarantees if their business deals only with taxable goods and services. “This simplifies things for some. However, companies with even a small portion of exempt income (like 2-3%) will still need to value the guarantee for tax purposes, creating inconsistencies,” Saurabh Agarwal, tax partner, EY said.
The problem will be for the infra projects and the real estate sector, where input tax credit is restricted. “While the provisions provide relief in cases where full input credit is available, in most cases where such guarantees are issued (such as real estate, infra projects), credit is restricted and hence GST paid would typically be a cost. This is an aspect, which the GST Council should perhaps reconsider,” said Pratik Jain, partner PwC India.
Source: The Economic Times
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