INTRODUCTION
In these present times of chaos, obtaining business finance seem to be met with difficulty. Despite of the fact that today there are multiple financial products, lending institutions often require businesses and entrepreneurs to present some sort of guarantee to secure their financial interests. One popular method that is prevalent amongst group companies involves issuance of corporate guarantee by the parent company on behalf of its subsidiaries.
Apropos to such corporate guaranties, the Goods and Services Tax (‘GST’) regime seems to have been marred by numerous interpretation. Which may potentially cause unintended disputes between tax payers and tax authorities. The concern of this article has been restricted to examine such transactions i.e. ‘applicability of GST on corporate guarantee with and without consideration’.
CORPORATE GUARANTEE (CG) / SPONSOR SUPPORT TRANSACTIONS
Generally the term “guarantee” as per Black’s Law dictionary is understood as “to promise that a contract or legal act will be duly carried out.” In the corporate and banking realm, corporate guaranties are executed to cover the risk for loans obtained by subsidiaries and to safeguard interests. The 2017 amendment to the Companies Act, 2013 was by far the most important amendments for intra-group financings. This allowed companies to provide intra-group collateral and cross collateralisation on assets in case of multiple group-companies.
Although this change under Companies Act, 2013 was considered helpful, it may potentially serve as a minefield for litigations under the GST regime. Since these type of transactions are often made with or without consideration to related parties and do not impact the financials of the company. Assessee's ignore to examine the applicability of GST on the same. Hence, examining the nature of supply and levy thereon is at the most relevant for corporates having such kind of arrangements.
The aforesaid arrangement has been illustrated below:
LEVY OF GST
The term “supply” under Section 7 of Central Goods and Services Tax Act, 2017 (‘CGST Act, 2017’) is an inclusive definition and not exhaustive. Hence, the scope is rather wide and the forms of supply specified in the definition are only given as illustrations. Meaning any other form of supplies will also be included, when made in course and furtherance of business or for a consideration. The extract of Section 7 relevant to this article is as under:
“7. (1) For the purposes of this Act, the expression “supply” includes––
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
….
(c) the activities specified in Schedule I, made or agreed to be made without a consideration
…”
On a perusal of the above Section, it may be inferred that for an activity to be construed as “supply”, it should involve a ‘consideration’ flowing from one person to the other. However, certain supplies of goods or services as enlisted in Schedule I, have been deemed to be a “supply”, even if made or agreed to be made without ‘consideration’. Therefore, it’s pertinent to understand the meaning of the term ‘consideration’.
“2(31) “consideration” in relation to the supply of goods or services or both includes––
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:”
In light of the above, there could be following two possibilities lieu of provision of corporate guarantee:
a) Guarantee fee/ commission is payable
b) No guarantee fee/ commission is payable
The same are discussed hereunder:
WITH CONSIDERATION
It is pertinent to note that in a scenario where a guarantee fee/ commission shall be payable by the subsidiary to the parent company, the same shall qualify to be a consideration in terms of section 2(31) above and the said transaction shall qualify to be a ‘supply’ as per Section 7 of CGST Act, 2017. Since, the transaction would qualify as ‘supply’, the same would be subject to GST.
WITHOUT CONSIDERATION
Whereas, in a scenario where a guarantee fee/ commission is not payable by the subsidiary to the parent company, then such transactions would need to be analysed further in terms of Section 7 (1)(c) of CGST Act, 2017, so as to determine whether the activity qualifies to be a ‘supply’, even in absence of consideration.
Section 7(1)(c) of CGST Act, 2017 specifies activities under Schedule 1, shall be treated as supply even if made without a consideration, when made in course and furtherance of business. The relevant portion of the Schedule 1 is as follows:
“Schedule I
Activities to be treated as supply even if made without consideration
2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:”
Accordingly, at this point it is pertinent to understand whether the parties involved in the transaction could be construed as ‘related persons’ in terms of the provisions contained in the CGST Act, 2017.
RELATED PERSONS
As discussed above, corporate guarantees are usually given by parent companies to secure the financial interests of their subsidiaries. Therefore, before proceeding further we shall examine the definition of related persons under the CGST Act, 2017. The relevant extract of which is as under:
“15.
…
Explanation.- For the purposes of this Act,––
(vi) persons shall be deemed to be “related persons” if––
…
(iv) any person directly or indirectly owns, controls or holds twenty-five per cent. Or more of the outstanding voting stock or shares of both of them;
(v) one of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person;”
Basis the above definition and given nature of transaction in question, providing corporate guarantees by a parent company to its subsidiary will qualify as a supply whether made for consideration or without one under Section 7(1)(a) or Section 7(1)(c), respectively.
However, the only exception would be when the underlying transaction does not tantamount to provision of a ‘service’. Where the transaction does not qualify to be ‘services’, the same cannot be construed as ‘supply’ under GST and hence, shall not be subject to GST.
PROVISION OF SERVICE
The definition of services is one which has been given a very wide meaning. As Section 2 (102) of CGST Act, 2017, defines services as “anything other than goods”. The relevant extract of Section 2(102) is as under:
“2(102) “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;”
At this juncture, given the expanse of the definition it is pertinent to understand the meaning of the term “anything.” The Hon’ble Supreme Court in the case of Government Of Nct Of Delhi v. Union Of India [2018 (7) TMI 1426 – SC] , analysed the meaning of the term “anything” and held the term needs to be understood depending upon the context and where it is being used, while interpreting any statute and taking into consideration the contextual meaning.
Further, in the case of Cricket Club of India vs. Commissioner of Service Tax, Mumbai [2015 (40) S.T.R. 973], the Tribunal while analysing the essence of ‘provision of service’ held that service transaction, until its benefit is perceived in the hands of the recipient and signified by readiness to recompense the provider shall not be regarded as provision of service. Further, mere monetary flow combined with convergence of two entities for such flow cannot be moulded by tax authorities into a taxable event without identifying the specific activity that links the provider to the recipient.
Basis the above discussion, one may argue that no benefit shall accrue to the subsidiary (despite some incidental / ancillary benefits) as a consequence of the said transaction, hence corporate guarantee transaction should not qualifying as a ‘service’ in terms of section 2(102) of CGST Act, 2017 and shall not be subject to GST on the following basis that:
There is no requirement for a corporate guarantee by the parent company in terms of the contractual obligations. However, the company issued the same in its capacity as a shareholder to protect its own investment in securities.[1] Thus, could be said to be a form of quasi-capital contribution, as it compensates inadequacies in the financial position.
A corporate guarantor does not arrange financing for the subsidiary. The funds are ultimately strengthening the liquidity position of the parent company and not of the subsidiary. Therefore, no provision of service.
Corporate guarantee gives rise to an unsecured contingent debt and this debt can be claimed by lenders from parent company in case subsidiaries fails to pay. Accordingly, corporate guarantee should not be regarded as an assurance service per se as there is no underlying supply of goods or services except supply of actionable claim i.e., corporate guarantee itself. Arguendo, even if there is an element of service involved in the transaction, it is not a different supply itself. Therefore, corporate guarantee should qualify as actionable claim and is not taxable under GST.
A parallel should be drawn between Government owned PSUs and private sector, as services provided by Central or State Government to any business entity including PSUs by way of guaranteeing the loan taken from financial institutions against consideration are ‘exempted’ vide Circular Number 154/10/2021-GST dated 17 June 2021. It must be noted that the said circular bears reference to Entry 34A of Notification No. 12/2017- Central Tax (Rate) dated 28 June 2017, wherein the applicate rate of tax is Nil.
Having regard to the above, although one would notice the apparent conflict between Circular Number 154/10/2021-GST dated 17 June 2021 and Circular number 34/8/2018-GST dated 01 March 2018, where the latter had clarified services provided by Central or State Government to any business entity including PSUs by way of guaranteeing the loan taken from financial institutions against consideration is taxable. Thus, the department could take a prima facie view that by a guaranteeing credit facility, the corporate guarantor primarily assists the subsidiary i.e. ultimate beneficiary, to avail credit facility from lending institutions. Accordingly, the same will qualify the definition of service and is taxable.
VALUATION OF CORPORATE GUARANTEES
In scenarios, where guarantees are provided by bankers. The same is regarded as a supply, as banks charge a fees/ commission or keep security towards their services. Thus, it is easier to arrive at a value for the transaction on which GST is levied. However, in case of corporate guarantee, where the purported transaction is between related parties. It presents issues in valuation of the underlying transaction, especially when the parent company charges certain fees/ commission.
Under GST, the department may cover corporate guarantee under Services Auxiliary to financial services (other than to insurance and pensions) under SAC 99715 as a taxable service. As discussed, bank guarantees are not comparable with corporate guarantees. Hence, the commission charged by Banks for corporate guarantee may not be taken for valuation.
Rule 28 of Central Goods and Services Tax Rules, 2017 (‘CGST Rules, 2017’) deals with valuation of supplies between related or distinct person. Wherein it provides for open market value or value of supplies of like kind and quality. Otherwise, Rule 30 or Rule 31 can be resorted.
However, in case of corporate guarantees it may be difficult to arrive at an open market value or value like supplies. Hence, the Assessee's will require to resort to Rule 30 or Rule 31 of CGST Rules, 2017. It must be noted that where the subsidiary is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value.
CONCLUSION
From above, it can be deduced that there can be different arguments for corporate guarantee to tax or not to tax under GST. It may potentially serve as a landmine for corporates engaged in the practice of issuing corporate guarantees. In order to bring some relief and to ensure the spirit of ease of doing business, the government should come out with some clarifications.
[1] Micro Ink v. ACIT, (2016) 176 TTJ 8 (Ahd).
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