On October 26, 2023, the Central Board of Indirect Taxes and Customs (CBIC) notified that Goods and Services Tax (GST) will be applicable to corporate guarantees between related entities, such as parent firms and subsidiaries, from October 26, 2023. This decision was taken by the GST Council on October 8, 2023.
What is a corporate guarantee?
A corporate guarantee is a promise by one company to pay the debts of another company if the latter company defaults on its payments. Corporate guarantees are often used by parent companies to guarantee the loans of their subsidiaries.
Why is GST being levied on corporate guarantees?
The GST Council has decided to levy GST on corporate guarantees because it considers them to be a supply of services. The guarantor is providing a service to the recipient by promising to pay their debts in case of default.
What is the rate of GST on corporate guarantees?
The rate of GST on corporate guarantees is 18%.
How is GST on corporate guarantees calculated?
The value of the supply of services for GST purposes is the financial consideration charged by the guarantor for providing the guarantee, or 1% of the amount of the guarantee, whichever is higher.
When is GST on corporate guarantees payable?
GST on corporate guarantees is payable at the time the guarantee is provided.
What are the implications of GST on corporate guarantees?
The levy of GST on corporate guarantees will increase the cost of borrowing for companies that rely on corporate guarantees to obtain loans. This could have a negative impact on investment and economic growth.
Exemptions from GST on corporate guarantees
The following types of corporate guarantees are exempt from GST:
- Corporate guarantees provided by a parent company to its subsidiary or vice versa.
- Corporate guarantees are provided by a company to its directors or employees.
- Corporate guarantees provided by a company to a government or public sector undertaking.
Conclusion
The levy of GST on corporate guarantees is a significant change in the tax landscape. Companies that rely on corporate guarantees to obtain loans should carefully consider the implications of this change and make necessary adjustments to their business plans.
Additional information
- The levy of GST on corporate guarantees is applicable only to corporate guarantees between related entities.
- The levy of GST on corporate guarantees is not applicable to corporate guarantees provided in the course of importing or exporting goods or services.
- The levy of GST on corporate guarantees is not applicable to corporate guarantees provided by a bank or financial institution.
- The levy of GST on corporate guarantees is not applicable to corporate guarantees provided in the course of providing insurance services.
Impact on businesses
The levy of GST on corporate guarantees is likely to have a negative impact on businesses that rely on corporate guarantees to obtain loans. This is because it will increase the cost of borrowing for these businesses.
The impact is likely to be most severe on small and medium-sized enterprises (SMEs), which often have limited access to capital. SMEs may find it more difficult to obtain loans and may have to pay higher interest rates.
The levy of GST on corporate guarantees is also likely to have a negative impact on investment and economic growth. This is because it will make it more expensive for businesses to invest in new projects and expand their operations.
Recommendations for businesses
Businesses that rely on corporate guarantees to obtain loans should carefully consider the implications of the levy of GST on corporate guarantees and make necessary adjustments to their business plans.
Businesses may want to consider the following options:
- Negotiate with their lenders to reduce the cost of borrowing.
- Explore alternative sources of financing, such as equity financing or debt financing from non-banking financial institutions.
- Reduce their reliance on corporate guarantees by improving their financial performance and creditworthiness.
Businesses should also consult with a qualified tax advisor to ensure that they are complying with all applicable GST requirements.