GST mechanism for corporate guarantee will have a prospective effect, a Finance Ministry notification has made it clear.

As recommended by the GST Council on October 7, the parent company’s corporate guarantee to its subsidiary for a bank loan will attract 18 per cent GST. Now, a notification dated October 26 says: “The value of supply of services by a supplier to a recipient who is a related person, by way of providing a corporate guarantee to any banking company or financial institution on behalf of the said recipient, shall be deemed to be one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher.” This means if the corporate guarantee were ₹100 crore, then ₹18 lakh would be the GST liability.

Earlier, a Finance Ministry statement, issued after the meeting of the Council had said that when no consideration is paid by the company to the director in any form, directly or indirectly, for providing a personal guarantee to the bank/ financial institutions on their behalf, the open market value of the said transaction/ supply may be treated as zero. This means there will be no GST if a director provides a personal guarantee for a loan from a bank or any financial institution to their own company.

Decoding the amendment, Rajat Mohan, Senior Partner with AMRG & associates, said: “This prospective modification shall have no bearing on transactions executed prior to October 26, 2023, consequently preserving the tax risk associated with past transactions.

Ambiguity surrounds the persistence of corporate guarantees, primarily because customary practice involves levying consideration at their commencement. Furthermore, corporate entities must carefully evaluate their tax position when reviewing or renewing corporate guarantees and within lending agreements where contractual constraints prevent the assessment of consideration.

“Prominently, industries benefiting from tax exemptions, including but not limited to petroleum, alcohol, real estate, healthcare, financial services, public transportation, and education, may potentially express apprehension regarding the charge of GST to corporate guarantees. This could result in an inescapable and significant financial encumbrance,” he said.

Supply to Special Economic Zones

Meanwhile, another notification allowed the suppliers to a Special Economic Zone developer or a Special Economic Zone unit to claim a refund on GST paid. “All goods or services (except the goods such as pan masala, tobacco, gutkha, etc.) as the class of goods or services which may be exported on payment of integrated tax and on which the supplier of such goods or services may claim the refund of tax so paid. All suppliers to a Developer or a unit in Special Economic Zone undertaking authorised operations as the class of persons who may make the supply of goods or services (except the goods such as pan masala, tobacco, gutkha, etc.) to such Developer or a unit in Special Economic Zone for authorised operations on payment of integrated tax and on which the said suppliers may claim the refund of tax so paid,” the notification said.

With this, the ambiguity on the possibility of claiming a refund of GST paid on supplies made by domestic suppliers to SEZ has been removed. Experts feel this helps prevent apprehended potential working capital concerns for domestic industry engaged in SEZ supplies.