The Goods and Services Tax (GST) regime is in need of clarity in certain respects. One oft-disputed matter is the taxability and valuation of support services under the GST law.
The law does not define the term ‘support services’. The erstwhile tax regime defined it as infrastructural, operational, administrative, logistic marketing, or any other kind of support. In common parlance, this term implies services that aid in the sustenance and advancement of an entity.
The wide scope of this term in the erstwhile tax regime and broad interpretations in the GST regime have spawned an increasing number of uncertainties. One of the topical issues in this context is the taxability of a corporate guarantee given in favour of related parties.
In the erstwhile tax regime, the provision of corporate guarantee in the absence of a consideration was not taxable. In fact, recently the apex court had ruled that issuance of a corporate guarantee in favour of a subsidiary company will not attract service tax in the absence of a consideration. On the other hand, under Schedule I of the Central Goods and Services Tax (CGST) Act, 2017, supply of goods or services between related persons in the course of, or in furtherance of business without consideration qualifies as ‘supply’.
Thus, the provision of corporate guarantee by a company to its related party may constitute ‘supply’ under GST law. However, this interpretation could bring under the ambit of ‘supply’ even those transactions that are not intended to be so.
A question can arise whether providing corporate guarantee to a related party constitutes part of the shareholding function. One may contend that provision of shareholder functions can be perceived as merely exercising control and not something that confers an economic value to the company. The London tribunal had presided over the issue of whether advice given to a group company, in connection with the group’s long-term strategy, qualifies as an ‘economic activity’ that attracts Value-Added Tax (VAT). The tribunal observed that ‘economic activities’ include all the activities of persons supplying services, and the strategies that a holding company would naturally lay down would not constitute a taxable supply.
Consonantly, the transfer pricing guidelines of the Organisation for Economic Co-operation and Development (OECD), inter alia, state that activity performed by a parent company for its subsidiary to govern its business is basically exercise of control function and cannot be considered a ‘service’. A relevant example cited is that the cost of raising funds for the acquisition of participations of the parent company and the cost relating to the parent company’s investor relations are essentially costs associated with shareholder activities.
Evidently, international standards recognise that where an activity is performed by a company solely for its interest in the group company, it would not be deemed as a service. However, one may contend that these activities are performed to govern the business of the group company and, therefore, qualify as ‘supply’.
Thus, a thin line separates what may qualify as shareholding function and what may be deemed ‘supply’. Nevertheless, it remains to be seen to what extent Indian courts will accept the principles propounded internationally. Even if provision of corporate guarantee to related parties qualifies as ‘supply’, there is no clarity on identifying the recipient of such service.
Both the group company and the bank/financial institution can be said to draw mileage out of a corporate guarantee transaction. Since the taxability of corporate guarantee requires identification of recipient, it is moot whether the recipient would be the group company in whose favour the corporate guarantee is given or the bank whose loan it secures.
Rule 28 of the CGST Rules, 2017, inter alia, provides that the value of supply shall be its open market value, if available. Else, it shall be the value of supply of like goods or services.
The issue here is the discernment of the open market value of the provision of corporate guarantee. This rule will be inappropriate especially when the open market value of such services cannot be determined for a company that doesn’t provide the service in the normal course of business.
The second proviso to Rule 28 states that where the recipient is eligible for full input tax credit (ITC), the value declared in the invoice shall be deemed to be the open market value Thus, one may adopt a reasonable value to discharge tax on corporate guarantee transactions. However, there is no clarity on the applicability of this proviso in cases where tax on corporate guarantee is not paid from inception of GST but after initiation by tax authorities.
Therefore, the issue over the valuation of the taxable service is another grey area.
Section 15(5) of the CGST Act entrusts the government with the power to notify the value of certain supplies. Therefore, to resolve this ambiguity, one can hope that the government either completely exempts the provision of corporate guarantee by related parties or fixes a value.
(The writers are Executive Partner, Principal Associate, and Associate, respectively, at Lakshmikumaran & Sridharan, a law firm)