Due to rule 28, all claims from corporate guarantee

- Sales Tax - Soham Mashruwala

The controversy over the treatment of corporate guarantees under the GST law has been hotly debated. The matter was discussed in the last Council meeting and in pursuance thereof the Government issued Notification no. 52/2023 Central Tax dated 26-10-2023 has been promulgated and new rule 28 has been added to CGST rule.

Recently after the notification the Government issued Circular No. 204/16/2023-GST dated 27-10-2023 which is discussed in today's article.

Situation under previous law

In case a unit has given a corporate guarantee as per bank provision for taking loan to its sub company/subsidiary company, if no compensation is charged then service tax would not be payable on such transaction. Edelweiss Financial Services Ltd. by the Supreme Court in this regard. In the case of (Diary No. 5258/2023) the judgment has been given as follows. Special emphasis has been laid by the Supreme Court on substitution ie ``Consideration''. Further, the definition of banking and financial services in the service tax regime cannot include any non-financial company other than a bank etc. so that service tax is not payable.

Encumbrance and provision under GST law

The concept of deemed supply has been introduced under the GST Act. Due to this provision, even if the holding company and the subsidiary company are related persons and the supply is made without any consideration, the transaction is deemed to be a supply and taxable. A lot of action was taken by DGGI department of Govt to collect tax in this regard and huge demand was created. Rule 28 was framed to end this controversy. Dated 26.10.2023.

Rule 28 CGS Rule

In case of corporate guarantee transaction with a related-person, the taxable value of supply guarantee will be calculated as 1% of the amount of supply guarantee or the substitute received, whichever is higher.

Explanation of circular

Two clarifications are given in the circular. 1) When the director gives his guarantee for the loan of the company, the company cannot pay any consideration for it as per RBI rules. Rule 28 shall not apply to such transaction. 2) In case of transaction of related person when rule 28 is applicable, it is mandatory to determine the amount of taxable supplier accordingly. Whether tax is recoverable or not is not to be seen and Rule 28 is supreme.