LI Network
Published on: October 28, 2023 at 11:50 IST
The Finance Ministry issues notification detailing the application of Goods and Services Tax (GST) to corporate guarantees provided by companies to their subsidiaries. The clarification follows the GST council’s decision to subject corporate guarantees to an 18 percent GST.
The announcement raised questions about the retrospective application of GST to past transactions, potentially impacting companies’ ability to recover tax amounts from subsidiaries.
To address this, the Finance Ministry introduces amendments specifying that GST on corporate guarantees applies from the date of the notification. The new rule imposes an 18 percent GST rate on 1 percent of the total guaranteed amount or the actual consideration, whichever is higher.
While this change doesn’t affect transactions before October 26, it emphasizes the need for careful consideration of tax implications in corporate guarantee agreements, especially in cases with contractual complexities. Understanding GST regulations in the context of corporate guarantees becomes paramount in light of this development.
The Finance Ministry has issued a notification indicating that the Goods and Services Tax (GST) will now apply to corporate guarantees extended by companies to their subsidiaries in the future. The clarification came after the Goods and Services Tax (GST) council, composed of central and state finance ministers, affirmed earlier this month that corporate guarantees would be subject to an 18 percent GST.
This development prompted inquiries from tax experts about the applicability of GST to past transactions, as many companies might encounter challenges in recovering the tax amount from their subsidiaries or affiliated companies.
To address this, the Finance Ministry has introduced amendments to the Central GST rules. These amendments specify that the taxation of corporate guarantees will be effective from the date of the notification. According to the notification, a GST rate of 18 percent will be imposed on 1 percent of the total guaranteed amount by the parent company or the actual consideration, whichever is higher.
Rajat Mohan, Senior Partner at AMRG & Associates, pointed out that this prospective modification does not impact transactions executed prior to October 26.
Therefore, the tax liability associated with previous transactions remains unchanged. Corporate entities are advised to carefully assess their tax position when dealing with corporate guarantees, particularly in the context of reviewing or renewing such agreements, especially when contractual constraints make it challenging to determine the consideration.