GST on Corporate Guarantees.

Corporate Guarantees are quite generic transaction among companies wherein holding or parent

companies issue corporate guarantee to various Banks or other Financial Institutions as a collateral security for the credit facilities availed by its subsidiaries. Also, corporate guarantee, is unsecured, which means it is not secured by or tied to any specific asset of the surety and these are issued without any fees or consideration.

Corporate Guarantees under Service Tax:

The taxability of corporate guarantees has been a bone of contention since a long time. The

department argues it to be an activity carried out by parent company towards subsidiary companies equating it with the bank guarantees issued by banks for securing the payments. However, the issue has been dealt by various judicial forums under the erstwhile service tax regime wherein it has been

observed that there is no provision in the scheme of valuation of service wherein notional amount can be deemed as a consideration for the purpose of arriving at value for payment of service tax.

Amongst other observations, the Courts have also observed that a b eing charged cannot be made leviable to service tax.

service without a consideration

Corporate Guarantees under GST regime

Under GST, S ection 7 of the CGST Act 2017 has been worded widely enough to cover any type of transaction under the head of 'supply'. Further, the definition of supply covers S chedule I which

d eems certain activities without consideration also as supply and it includes supply of goods/services b etween related persons made in the course or furtherance of business.

Accordingly, the earlier argument to counter the levy of tax on corporate guarantee will not be

possible due to the aforesaid entry in S S chedule I and it appears that corporate guarantees, being a

transaction between related person without consideration, will be deemed as supply under S S chedule I  and will be taxable under GST.

However, before reaching the above conclusion, the pertinent question to consider is whether issuance of corporate guarantee is actually a supply or not in a general sense.

Can issuance of Corporate Guarantees qualify as "Supply"'

Let's first analyse what corporate guarantee is and how is it different from bank guarantee.

A bank guarantee is a surety that the bank will pay off the debts in case the business entity is unable to do so. For this, banks run risk assessments to ensure that the guaranteed sum can be retrieved,

and bank may also require a security in the shape of cash or capital assets.

However, corporate guarantee, apart from the fact that no fee is charged, corporate guarantees are issued without any security or underlying assets. These are based on the business needs and for

group synergy. These are issued for the subsidiaries to raise funds for their own needs and it should be treated as shareholder activity.

- Corporate guarantee is entirely entrepreneurial in the sense and it is issued for maximization of gains for the recipient entity and thus the group as a whole.

- A guarantor does not arrange financing for the debtor, but merely executes a financial instrument in its favour. These guarantees do not cost anything to the guarantors.

- Lastly, it can also be said to be a mode of ownership contribution, since it is generally given to compensate for the inadequacies in the financial position of the borrower and it can be said to be in the form of quasi-capital as well.

The above line of arguments has been considered in various decisions of Income Tax where the question was to analyse coverage of corporate guarantee within the meaning of international

transaction. However, the same was not argued in earlier service tax regime and it is also yet to be tested under GST.

Another angle to see whether corporate guarantee can qualify as an actionable claim or not and therefore it should be outside the ambit of supply as per S S chedule III  of CGST Act.

Is Corporate Guarantee an Actionable Claim'

Schedule III of the CGST Act under Clause 6 mentions that actionable claims are not to be considered either as a supply of goods or services. Section 3 of the Transfer of Property Act, 1882 defines

actionable claim to mean claim to any debt, other than a debt secured by mortgage of immovable

property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent,

accruing, conditional or contingent.

From the above, it can be seen that actionable claims are primarily claims that arise with respect to unsecured debts or a beneficial interest in movable property, regardless of whether such debt or

beneficial interest be existent, accruing, conditional or contingent.

However, it is to be noted herewith that the argument of actionable claim was not contended in earlier regime and it is also yet to be tested under GST.

Conclusion

Taxing corporate guarantee between parent company and subsidiary appears to be a highly disputable area having wide range of issues. Furthermore, the taxability of corporate guarantee in service regime was rejected by courts due to the mere fact that there was no consideration. The above discussed issues i.e. shareholder activity or actionable claim will be raised in GST litigation and the courts will

decide whether it is a supply or not a supply. As on date, there is no guarantee that corporate guarantee will not qualify as supply.