The Punjab & Haryana High Court issued a stay on a circular regarding the taxability of corporate guarantees between related parties obtaining loans from banks or financial institutions. Industry experts believe that this ruling will bring relief to various sectors, including petroleum, alcohol, real estate, healthcare, financial services, public transportation, and education, benefiting from tax exemptions. There were concerns that this mechanism could lead to significant financial burdens.
Last year, on October 7, the GST Council recommended an 18% tax on a parent company’s guarantee to its subsidiary, while excluding a director’s personal guarantee. Subsequently, this recommendation was notified and a circular was issued. The first part of the circular focused on the personal guarantees given by directors, while the second part dealt with the corporate guarantees given by the parent company to its subsidiary for a bank loan. The High Court has now stayed the second part of the circular.
The notification and related circular stipulated that the GST mechanism for corporate guarantees would have a prospective effect. According to the explained mechanism, in the case of a corporate guarantee of ₹100 crore, the GST liability would be ₹18 lakh.
The decision to stay the CBIC Circular on corporate guarantees highlights the complexities and the urgent need for clarity within the GST framework. The taxation of corporate guarantees, especially those without consideration, presents significant challenges in valuation. Despite recent amendments to valuation rules, they do not appear to facilitate ease of doing business, as different laws could propose varied arm’s length prices for the same transactions. It is important for the court to consider these issues, which may ultimately lead to the rationalization of the provision.