Corporate guarantee: A ‘yearly’ quandary
The 53rd Goods and Services Tax (GST) Council meeting had raised the hopes of taxpayers for some clarity on the valuation of corporate guarantee services provided to related parties. However, the latest retrospective amendment on July 10 appears to be moving in the opposite direction.
In October last year, the government brought in a rule that the value of corporate guarantee services provided to a related recipient shall be deemed as 1 per cent of the guaranteed amount or the actual consideration, whichever is higher. This raised the worry of taxpayers, especially those without the benefit of input tax credit.
Recently, another amendment granted exemption from the rule for services that are exported or for recipients eligible for full input tax credit. It also inserted the words ‘per annum’, implying 1 per cent of guaranteed amount offered per annum.
A government circular clarifying the scope of the amendment has assumed that corporate guarantees are taxable, but does not provide any rationale for the assumption. It says tax must be paid on issuing corporate guarantee in the first year as well as on every renewal in subsequent years. Also, for the 1 per cent calculation, the sanctioned amount, rather than the disbursed loan amount, must be considered.
