Real Estate Developers Urge 18% GST Amendment on Corporate Guarantees in Representation to FM

Real estate developers have reportedly approached Finance Minister Nirmala Sitharaman, urging amendments to the recent circular imposing an 18% Goods and Services Tax (GST) on corporate guarantees provided by related parties, according to government sources.

Developers argue that the 18% GST should apply to either the actual consideration or 1% of the guarantee amount, whichever is lower. The current circular, however, bases the GST on the higher of the actual payout or 1% of the loan amount.

Several industry bodies, including realty developers, are preparing representations to challenge the recent ruling. With courts currently on vacation, these representations are expected to be filed through writ petitions in the first or second week of January.

Government sources reveal that the upcoming GST Council meeting, scheduled for January, may address this issue. Experts anticipate significant repercussions for the infrastructure and real estate sector, both heavily reliant on external financing and borrowing for large-scale projects.

Under the new rule, the taxable value of corporate guarantees is determined as either 1% of the guarantee amount or the actual consideration paid, with GST applicable on the higher of the two. This implies that GST will be levied on guarantees between related parties, even if the subsidiary company cannot claim full input tax credit.

An expert argues that guarantees issued by the parent company should not be considered a service to the subsidiary, as guarantees, being actionable claims, do not fall under the category of goods or services and should be exempt from GST. The expert points out that the parent company cannot charge consideration to the subsidiary due to commitments made to banks, further supporting the argument against GST imposition in the absence of consideration.

In anticipation of the potential impact on the infrastructure and real estate sector, stakeholders are gearing up to challenge the ruling, emphasizing the need for a reconsideration of the GST framework for corporate guarantees.