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Navigating GST impact on Financial Transactions beyond Corporate Guarantees

The primary confusion that persists is whether it constitutes a supply of service when a corporate guarantee is provided by a related party against a loan facility. In this regard, Circular No. 204/16/2023-GST (“Circular 204”) was issued which clarified that a corporate guarantee provided by a company for credit facilities availed by another company, where both the companies are related, is to be treated as supply of services.

However, writ petitions have been filed before the Hon’ble Delhi High Court and the Punjab and Haryana High Court with respect to the issue of corporate guarantee.  In the case of M/s Sterlite Power Transmission Limited v. Union of India, interim protection has been granted to the petitioner against any coercive steps in case any demand is created on the supply of corporate guarantee. Further, in Acme Cleantech Solutions (P) Ltd. v. Union of India, the Court has stayed the effect of Circular 204 to the extent it clarified that the provision of corporate guarantee to a related party shall be treated as a supply even when made without consideration. The Court was of the view that the appellate authority shall be free to decide the issue without being influenced by the clarification provided.

Further, the government through the amendment vide Notification No. 52/2023 – Central Tax (“Notification 52”), inserted sub rule (2) of Rule 28, with an aim to provide clarity over the valuation of such transactions. Rule 28(2) provides that the value of supply of services by a supplier to a recipient who is a related person, by way of providing a corporate guarantee to any banking company or financial institution on behalf of the said recipient, shall be deemed to be 1 per cent of the amount of such bank guarantee offered or actual consideration, whichever is higher.

Though issued with an aim to provide clarity to the taxpayers, the Notification and its pursuant Circular have arguably raised more doubts than before in the minds of taxpayers.

Taxpayers are troubled by issues such as whether the provision of a corporate guarantee is a one-time supply or a continuous supply, and whether the one per cent fee should be calculated solely on the loan amount or whether it should include interest as well. Further, the valuation of supply of a corporate guarantee executed prior to the insertion of Rule 28(2) has also been a cause of concern for the taxpayers.

However, an issue which is being overlooked but could potentially emerge as a major issue down the line is GST implications on financial assurances or support agreements. Such support agreements need to be thoroughly analysed on the touchstone of corporate guarantee for the purpose of GST laws.

Source: Barandbench

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