[Opinion] GST on Corporate Guarantee

Shruti Kabra – [2023] 155 taxmann.com 152 (Article)

We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by Fear of Government Authorities

In today’s era Companies are paying taxes in majority of situations due to fear of litigation, unjustified harassment from Government Notices, and huge penalties. A few of such issues in GST law includes taxability on notice pay recoveries, ITC reversal on sale of scrips, cross-charge & intergroup services, inter-head tax payment etc.

One amongst such ambiguous matters is leviability of GST on corporate guarantee (CG). CG has been bone of contention for a long time where clarity from CBIC is much needed.

We understand that a guarantee is a legally binding agreement, signed by a guarantor to repay debts on default of borrower. It guarantees that if a default from borrower is triggered which cannot be resolved, the guarantor will bear the credit exposure.

From the lender’s perspective, a guarantee is considered as indirect security. In other word a guarantee is a strong indirect security which can make a good deal a much more attractive place to deploy capital.

But corporate guarantees are inherently more complicated. As the lender here has to understand the net worth of guarantor instead of borrower.

A corporate guarantee is a legal promise or commitment made by one company (the guarantor) to assume responsibility for the debts, obligations, or liabilities of another company (the beneficiary or principal debtor) in the event that the principal debtor fails to meet its financial obligations. In essence, it’s a form of financial support or assurance provided by a financially stable or creditworthy company to help secure a transaction or arrangement involving the beneficiary company.

Corporate guarantees are critical in business operations, especially in the case of receiving or creating credit. It can be either limited or unlimited.

Most corporate guarantees are granted to banks and other lenders by the parent company on behalf of its subsidiary. It is merely an entrepreneurial act which is given to get synergy gain to group as a whole, and generally doesn’t have consideration or security attached. It is a consensual security for collateral on loans provided by banks or other lenders.

This guarantee will show how much of a loan will be given and who will take the responsibility if the debtor defaults on the loan.

Taxability of corporate guarantee was always in discussion even in erstwhile service tax regime. However, the same has come to an end with the Supreme Court Judgment in the case of Commissioner of CGST and Central Excise v. Edelweiss Financial Services Ltd. [Order No. 5258 of 2023, dated 17-3-2023] wherein it was held that issuance of corporate guarantee to a group company without consideration would not fall under the definition of service as given under section 65B(44) of the Finance Act 1994 due to noninvolvement of consideration in such transaction.

The same has been in heated conversation in GST Law as well, especially after the clarification issued by CBIC vide Circular No. 34/8/2018-GST dated 01.03.2018 claiming that 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.

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