Introduction
The GST regime brought numerous changes to the pre-GST regime taxation. It brings various transactions into GST net which otherwise not liable to tax in pre - GST era by way of wide inclusive definition of supply and business further by way of Schedule I to supply. In this article author made an effort to examine one such transaction is ‘applicability of GST on inter corporate guarantee without consideration.
A corporate guarantee is a contract between a corporate entity or individual and a debtor. In this, the guarantor agrees to take responsibility for the debtor's obligations, such as repaying a debt. When a company guarantees repayment of a loan granted to one of its subsidiaries if the subsidiary defaults on the loan, the guarantor who agreed guarantees that the loan will be repaid.
In general, these corporate guarantees are issued to safeguard and support the financial health of their associate enterprises or to facilitate a smoother functioning of the whole group. Apart from the fact that no fee is charged, corporate guarantees are issued without any security or underlying assets. These guarantees are majorly motivated by business needs.
Further, the Companies Act, 2013, allows for Inter- Corporate guarantees among related parties subject to the condition that such loans when provided by the holding companies be used by the subsidiary companies for its principal business activities.
Since this type of transaction is affected out of books (will not impact the financial statements) and is without consideration, it is often ignored by the assesses to examine the applicability of GST on the same. Hence examination of supply & taxability of inter corporate guarantee transactions under GST is at most relevant for all the corporates who are having this kind of arrangements.
- The term “Supply” is defined under section 7 of the CGST Act to include all forms of supply such as sale, transfer, barter, exchange, license, rental, lease or disposal of goods or services or both, made or agreed to be made in the course or furtherance of business and for a consideration and Includes activities mentioned in Schedule I to the Act which are made or agreed to be made without consideration.
- let us try understanding whether extending guarantee by a corporate entity to its subsidiaries constitutes taxable supply or not.
- Considering the above discussion, Section 2 (102) of CGST Act defines services as anything other than goods. By guaranteeing credit facility, the guarantor primarily assists the borrower in availing credit facility, therefore it appears an element of supply of service.
The Hon'ble Chennai Tribunal in Sterlite Industries India Ltd. vs Comm of CGST, noticed the following features of corporate guarantee;
6.6 ..............A corporate guarantee is a guarantee given by the corporate to cover their own exposure or exposure of some other related entity to their bank................. The corporate guarantee that was entered into by appellant is only for the limited purpose of securing loans to its subsidiaries. Corporate guarantees are issued in order to safeguard the financial health of their associate enterprises and to provide it support................... Corporate guarantee is actually an in-house guarantee and is not issued to customers generally.
Importantly in Sterlite Industries supra, the Tribunal held that providing corporate guarantee is not taxable Banking and Other Financial Services, however the ratio of this decision might be relevant given the revenue did not alleged taxability under Auxiliary or Business Support services. More-over the dispute pertained to period before FY 2010-11, when service tax was leviable under specific list of services, while under GST or even service tax (negative list regime), all services except as specified in the exemption list are not taxable.
In Olam Agro vs CCE, the Delhi Tribunal upheld the leviability of service tax on extension of corporate guarantee under the head “Business Auxiliary Services”, effectively ruling out the significance of ruling of Sterlite Industries supra.
Government has clarified vide Circular No. 34/8/2018-GST dated 01.03.2018 wherein, it is clarified that if 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 shall be taxable. Hence, it supports the view that transaction of guaranteeing loan with consideration qualifies as supply and therefore, is leviable to GST. The non-operative terms viz. “consideration” in the clarification may not be taken as shelter, in the light of clear provisions of law.
Further, for the given set of supplies in Schedule I, the requirement of flowing of consideration from the recipient is not necessary. S. No. 2 of Schedule I, as relevant in the present scenario is extracted below.
“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, it cannot be said that corporate guarantees are issued without consideration and not leviable to GST due to the aforesaid entry in Schedule I. Thus, it appears that corporate guarantees, being a transaction between related person without consideration, will be deemed as supply under Schedule I and will be taxable under GST.
According to Schedule III which are neither to be treated as a supply of goods nor supply of services include “Actionable claims, other than lottery, betting and gambling.”
Alternatively, possible argument is whether transaction of issuing corporate guarantee can be said as supply of actionable claim accordingly it should be outside the ambit of supply as per Schedule III of CGST Act.
According to section 3 of transfer of property act actionable claim means a claim to an unsecured debt which has beneficial interest in a movable property.
From the above it can be said that issuance of corporate guarantee will not fall under the definition of actionable claim. In other words, granting of a corporate guarantee shall not amount to a claim of unsecured debt. However, upon failure to pay by principal debtor, the guarantor is liable to pay the amount to the creditor which shall qualify as an actionable claim but issuance of corporate guarantee itself shall not qualify as actionable claim and accordingly taxable under GST.
CONCLUSION
On a combined reading of all the paragraphs above discussion, supply of corporate guarantee is a supply of service accordingly liable to GST. The view/logic of lack of consideration may not be acceptable in as much as provision of Schedule I are noticeably clear where consideration is not required in respect of transaction between related persons. Further, it will not even fall under the category of actionable claim. Hence issuance of inter corporate guarantee without consideration is a taxable supply under GST.
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