Corporate Guarantee under GST

In a recent order passed by the Bombay High Court in the case of Vedanta Ltd. v. Union Of India, the operation of Circular No. 204/16/2023-GST, dated 27-10-2023 declaring corporate guarantee by parent company to its subsidiary as “supply of services” under Section 7 of Central Goods and Services Tax Act, 2017 (CGST Act) has been stayed. The Circular has been challenged before the court on the ground that corporate guarantee do not constitute supply of services and hence, it is not taxable.

Several High Courts, including the Punjab & Haryana High Court in Acme Cleantech Solutions (P.) Ltd. v. Union of India and Telangana High Court in M/s. Greenko Solar Power (Medak) Ltd v. The Additional Commissioner and others have also granted a stay on its enforcement. However, the final decision is pending in all these cases.

Although the controversy of taxing corporate guarantee has been in existence since the service tax regime, however, the issue has escalated with the issuance of various circulars by the Central Board of Indirect Taxes and Customs imposing 18% GST on corporate guarantee. Various legal complexities have come forward as to whether corporate guarantees should be considered as a taxable supply of services under the CGST Act, 2017 given the far-reaching implications of the same on the corporate sector. This blog intends to reconcile these interpretations by examining the interplay between the Indian Contract Act, 1872 and the CGST Act, 2017 while also proposing solutions which would essentially balance the rights of the assessee and the interests of the revenue. Understanding Corporate Guarantee and its status in the pre-GST regime Corporate Guarantee is a commitment undertaken by a parent company providing guarantee to financial institutions or banks to fulfill the financial obligations of its subsidiary in case of any default. In most of these instances, such guarantee is provided by the parent company without obtaining any consideration from its subsidiary, unlike the cases of bank guarantee. However, when the revenue began imposing service tax on corporate guarantees under Banking and other Financial Services, a dispute arose regarding whether the corporate guarantee which is provided without any consideration could be considered as a supply.

The Supreme Court cleared the air on this issue in the case of Commissioner of CGST and Central Excise v. Edelweiss Financial Services Ltd. by ruling that corporate guarantee given for subsidiary company without consideration is not liable to service tax.

Rationale of taxing corporate guarantees under the GST regime. however, Rule 28(2) of the CGST Rules which was inserted by way of Notification no. 52/2023dated 26/10/2023 clearly lays down that if a supplier provides corporate guarantee to a bank or financial institution on the behalf of the recipient, the same is to be deemed as “supply of services”, taxable to GST under Section 9 of CGST Act. The department’s rationale is that under the GST regime, the SC’s judgment would not apply since the term “supply” has been accorded with wider meaning. Although, for any activity to be treated as supply the same must include consideration, however this condition can be exempted if the activity falls within Schedule I of the CGST Act. Under Schedule I, supply of goods or services between related persons is considered to be supply even if the same is without consideration.

Now, in accordance with Section 2(84) of the CGST Act, a parent company and its subsidiary would fall in the definition of related persons. Therefore, the department believes that the supply of services by a parent company to its subsidiary, even in the absence of consideration, would be chargeable to GST.