In anticipation of a big blow for the industry, the upcoming GST Council could levy an 18 percent GST on loans secured by India Inc on bank guarantees.
GST Council Expected To Levying 18% GST On Loans Secured via Corporate Guarantees
“The GST Council is likely to deliberate on the proposal to levy 18 percent GST on corporate guarantee extended by holding cos/ subsidiaries,” media reported on october 4.
According to this report, this view has come up keeping in mind that the “council nominated law committee had come across such cases and the law committee is of a view that extending corporate/personal guarantee is a related party transaction and is considered as a supply. The GST Council is likely to levy an 18 percent GST on loans secured by India Inc on bank guarantees.”
In addition to this, the GST council is expected to deliberate on levying 18 percent GST on personal guarantee given by promoters/directors against loans given by banks, the same report noted.
“For ease in valuation, the council is likely to consider bank commission as a standard basis to calculate GST liability,” sources noted.
A Debate For Clarification
These two scenarios were clarified for 18 percent GST in case of PSUs in 2018 earlier.
Now, the council is likely to clarify the same for all, that is all industries, and not just PSUs.
“There has been a debate whether providing ‘corporate guarantee’ is a service or a shareholder’s function. It’s not too much of an issue if input credit is available to the recipient. However, in many cases, corporate guarantees are issued in sectors such as power, construction, real estate etc., where credit is not available. Further, there is an issue of valuation. Ideally, the valuation should not be similar to a bank charge because the risks and circumstances are entirely different in most cases. The GST council should ideally engage with industry a bit more before issuing a clarification or making any changes in the law,” said Pratik Jain, Partner and National Leader for Indirect Tax in PwC.
According to the Tax experts, this move could be a big negative for the industry as it will increase the cost incurred by companies to secure loans.
As per Rule 28 of the CGST Rules, 2017, ” the value of supply shall be open market value (OMV), if available. Else, it shall be the value of supply of goods or services of like kind and quality. OMV may not be ascertainable for corporate guarantee. Banks charge a particular percentage (as a commission) of the amount of Bank guarantee issued; percentage of commission used for Bank guarantee purposes could possibly be used for valuation of corporate guarantee. Apparently DGGI has already issued notices to corporate houses on the issue of GST on corporate guarantee and this clarity would trouble industry.”
The 52nd meeting of the GST Council is scheduled to be held in New Delhi on October 7.
Prior to this, the council had approved amendments to the Goods and Services Tax (GST) laws to provide clarity on the taxation of casinos, horse racing and online gaming during its previous meeting on August 2.
This year’s meeting is expected to be looking at lowering of the Goods and Services Tax (GST) rate from the current 28 percent on motor vehicles purchased by the visually impaired, as per the media report.
