Companies Challenge GST on Free Corporate Guarantees in Gujarat High Court
Summarized by AI; it may make mistakes. Check important info
Summarized by AI; it may make mistakes. Check important info
The legal battle over the levy of Goods and Services Tax (GST) on corporate guarantees issued without consideration has reached the Gujarat High Court, with several companies challenging the government's decision to tax such transactions.
Why the dispute?
A corporate guarantee is typically issued by a holding company to help its subsidiary, sister concern or related entity obtain loans from banks. In most cases, no fee or commission is charged for providing such a guarantee.
However, the GST department considers a corporate guarantee to be a taxable service, arguing that while it is not a supply of goods, it qualifies as a supply of services under the GST law. Consequently, GST is levied even when no monetary consideration is received.
GST valuation
Under Rule 28(2) of the Central Goods and Services Tax (CGST) Rules, the value of a corporate guarantee is deemed to be 1% of the guaranteed amount per year, and GST is calculated on that value.
The department has also maintained that the provision applies even when a guarantee is issued by an external entity or a government-owned company, leaving no exemption for guarantees provided between related entities.
Companies challenge GST rule before Gujarat High Court
Several companies have moved the Gujarat High Court, challenging the constitutional validity of Rule 28(2) and the related government notification.
The petitioners argue that where no fee or consideration is received, the transaction cannot be treated as a taxable service and, therefore, GST cannot be levied.
Government defends tax on corporate guarantees
The government has defended the levy, contending that corporate guarantees between related parties constitute a taxable supply under the GST framework and that the absence of consideration does not exempt such transactions from taxation.
The matter is now pending before the Gujarat High Court, and its outcome is expected to have significant implications for corporate groups, inter-company financing arrangements and the GST treatment of corporate guarantees.
