Is it necessary to pay GST on corporate guarantee?

- Sales tax - Soham Mashruwala

There are many complex questions under GST law. Circulars are often issued by the government but this creates more confusion instead of clearance. The tendency of the government to levy some tax on every type of transaction is never going to change and its implementation by the GST law is being done very badly. Under the GST Act, there is a broad definition of supply and in turn, deemed supply has also been introduced. As per Appendix I of the GST Act, the supply of goods or services to a 'related party' will be treated as a supply even if it has been transacted without compensation. In this regard, there is a possibility of a fierce controversy under GST regarding corporate guarantee and as the government changes the circulars, the difficulties of the supplier are bound to increase. Kher Andheri Nagari and Gandu Raja.

Conflicting circulars

It was clarified by the Government through Circular No. 3/4/2018-GST dated March 1, 2018 that when a State Government guarantees a loan to a company owned by it, the transaction will be considered as taxable supply and GST will have to be paid. At present, the new circular No. 12/10/2031-GST issued by the Government on 15th June, 2021 stipulates that when the State or Central Government provides loan guarantee service to its unit or PSU unit, the transaction is exempt from 1st July 2018. In fact, the circular dated March 1, 2018 was wrong.

Private Company-Limited Company

In the case of a private company or a limited company, a corporate guarantee is often given in respect of taking a loan to its own subsidiary or group company. According to the circular of the Government, this service will be considered as amnesty only when the State or Central Government provides such service to its unit and compensation is charged. Thus, when such transactions are done in the case of a private or limited company, the tendency of the government to levy taxes is unmistakable. Is it really necessary to pay GST on such transactions? Respect when the service tax was implemented in previous years. Sterlite Ind by Chennai Tribunal (CESTAT). Lee. Vs. Ruling by the Commissioner of GST and Central Excise (Appeal No. ST / 40042/2013 /) that corporate guarantee is different from bank guarantee and such guarantee is generally given to strengthen and protect the financial position of the associate company attached to it. And there is no provision to pay service tax. At the time of this judgment, there was a provision to pay service tax on all services. Of special note is the fact that no private company or limited company has the authority to give corporate guarantee but only if the shareholders of such company allow it. There is no obligation to pay GST on such transaction and if there is such provision, it can be considered void. How can this transaction be considered as service when there is no definition of service. There is a provision for dealing with a related person as a deemed supply when it is not charged, while a private or limited company is given a corporate guarantee to its associate company which falls under the definition of 'related person'. Is. If no compensation has been taken in respect of any loan then the amount of supply has to be determined as per the valuation rule. In fact, such transactions when the company does not have the power to do so and the transactions being done by the shareholders need to be included in Appendix III. Perhaps in case of tax being levied by the department on such transactions, the amount fixed by the officer of the account when the tax is due is not valid as the officer has to accept the amount mentioned in the bill as per the provisions of Rule 3.

Thus, in this case there is a permanent dispute over the liability of GST on the transaction of corporate guarantee so that the amendment is inevitable.