New Delhi: The GST Council is likely to introduce an 18 per cent tax rate on corporate guarantees extended by parent companies to their subsidiary firms for getting loans from banks, according to reliable sources.
The issue was taken up by the GST Council’s law committee during various meetings held recently.
The law committee is of the view that extending a corporate guarantee is a related party transaction that is considered as a supply. The logic is that since supplies come in the 18 per cent GST bracket, this should also be applicable to corporate guarantees.
The law committee has recommended adopting valuation rules in line with safe harbour rules under the Income Tax Act for providing corporate guarantees.
Under these rules, in eligible international transactions, the minimum acceptable commission/fee is 1 per cent of the amount guaranteed.
Therefore, it was proposed that there is a need to consider adopting the same in the case of related party transactions under GST as well.
The final decision will be taken at the GST Council meeting on Saturday.
A corporate guarantee is an arrangement among group companies by which a parent company agrees to act as a guarantor for a subsidiary company while securing credit facilities from a bank.
These arrangements are executed either without any consideration or with a nominal commission on the loan amount.
The GST Council is also expected to take up the issue on whether this 18 per cent GST should be levied on personal guarantee, as well given by promoters/directors for loans given by banks to a company.
In the case of a personal guarantee, the law committee cited the Reserve Bank of India’s mandate which states that no consideration by way of commission, brokerage fees, or any other form could be paid to the director by the company, directly or indirectly, in lieu of providing a personal guarantee to the bank for borrowing credit limits.
This appears to suggest that the 18 per cent GST is not strictly applicable in cases of personal guarantees.
(IANS)
