Infra Companies to move to court against GST on corporate guarantee

Multiple real estate and infrastructure companies plan to file writ petitions in several High Courts in the days ahead, challenging the 18% Goods and Services Tax levied on corporate guarantees issued by parent companies to their subsidiaries and connected parties in order to improve lenders’ confidence.

Following the GST Council‘s decision to tax these guarantees in late October, as many as 50-60 of these companies received tax notices. According to experts, the new tax would generate stress in the infrastructure sector because many firms rely largely on external financing for mega projects.

According to the sources, companies are going to challenge the basis of taxing corporate guarantee as a service given. The petitions will also raise concerns about the valuation mechanism for taxing such transactions, as well as the latest set of notices’ retroactive effect.

A government official said that almost 5 dozen companies, including some in the power and other infrastructure sectors, as well as real estate firms, have been issued notices requesting tax on corporate guarantees, adding that the total tax claims raised through these notices may exceed Rs. 1,000 crore.

DLF, IL and FS Ltd., Indiabulls Real Estate, and Supertech are among the companies that have received the notices, according to an official who commented on the condition of anonymity.

One of the aforementioned companies confirmed receiving such a warning. “…like many others, we received it (the GST notice).” On the condition of anonymity, a source within the company said, “We will all move the court…. this notice will not stand in court.”

When contacted, a Supertech representative stated, “We are unaware of any such notices.” Queries submitted to others received no response.

As stated in a notification issued on October 26 by the Central Board of Indirect Taxes and Customs (CBIC), GST will apply at an 18% rate on corporate guarantees involving parents, subsidiaries and other related parties. The levy will be based on either the financial consideration charged by the guarantor for the service or 1% of the guarantee’s value, whichever is higher.

The new rule would govern the value of such supply of services of corporate guarantee supplied between related parties, regardless of whether full Input Tax Credit (ITC) is accessible to the recipient of services or not, according to the notification.

Earlier, in its 52nd meeting, the GST Council announced that no GST would be payable on corporate guarantees granted to a bank by a director against loans sanctioned to a company if no fee is paid to the director for such service.

Ankur Gupta (Practice leader, Indirect Tax at SW India) stated that numerous companies, particularly those in the energy and real estate sectors, create a special purpose vehicle for each project. As a result, the primary business must provide guarantees to financial institutions in order for them to grant funding to these SPVs.

The industry’s petition is that providing guarantees is not a benefit extended to its SPVs but rather an essential requirement for SPVs to remain functioning. Because the SPVs are new, raising funding is difficult for them, hence the assurance from Indian holding companies.

According to Manish Mishra, Partner at JSA Advocates and Solicitors, the valuation mechanism of 1% of the borrowed amount is arbitrary and problematic. He stated that transfer pricing assessments are typically performed at 0.25-0.30%. Tax experts have also stated that because the revisions are prospective, no requests should have been made for previous periods.