GST Relief on Corporate Guarantees: Experts Say Power, Realty Firms Won't Benefit
The GST Council's decision to exempt corporate guarantees from tax in two specific scenarios may not provide relief to power and real estate companies facing tax liabilities of Rs 1,000 crore.
GstCorporate GuaranteePower SectorReal Estate SectorTax ExemptionInput Tax CreditReal Estate NewsJun 23, 2024
In an earlier meeting, the Council had decided that the consideration for the issue of corporate guarantee would be 1% of the value of guarantee or the actual amount charged, whichever is higher. A notification to enforce this decision was issued in October 2023, making GST applicable at a rate of 18% to corporate guarantees between parent and subsidiaries and other related parties.
Several infrastructure firms, including real estate and power companies, filed writ petitions before courts, challenging the 18% levy. According to an official source, 50-60 such companies have received tax notices after the GST Council's decision, with the aggregate tax demands raised via these notices being over Rs 1,000 crore.
Among the companies that had been slapped with these notices are DLF, IL&FS, Indiabulls Real Estate, and Supertech. On Saturday, the Council proposed an amendment to Rule 28(2) of CGST Rules, 2017, stating that valuation under the said rules would not be applicable in case of export of such services (for instance, guarantee given for a foreign subsidiary), and where the recipient is eligible for full input tax credit.
However, experts believe that this amendment would not benefit power and real estate companies, as they do not meet the two specified criteria. Gunjan Prabhakaran, partner at BDO India, noted that the amendment would help in easing the compliance and record-keeping burden and reduce fund blockages in some cases. But, Ankur Gupta, Practice Leader – Indirect Tax at SW India, said that the demand for exemption from these sectors would continue.
Many companies, especially in the energy and real estate sector, float a special purpose vehicle (SPV) for each project. To extend funding to these SPVs, the main entity has to give guarantees to financial institutions. The industry's plea is that giving guarantee is not a benefit or a supply of service that they are extending to their SPVs, but a 'necessity' for SPVs to remain operational. Since the SPVs are newly set-up, raising funds becomes a challenge for them, hence the need for guarantee from Indian holding companies.
Information
GST Council is the apex decision-making body for the GST, which is a comprehensive indirect tax levy on goods and services in India. The Council is headed by the Union Finance Minister and consists of representatives from all states.
BDO India is a leading professional services firm providing audit, tax, and consulting services. SW India is a leading consulting firm providing indirect tax services.
Keywords GST, Corporate Guarantee, Power Sector, Real Estate Sector, Tax Exemption, Input Tax Credit, Export of Services
Frequently Asked Questions
What is the rate of GST applicable on corporate guarantees?
The rate of GST applicable on corporate guarantees is 18%.
What is the consideration for the issue of corporate guarantee?
The consideration for the issue of corporate guarantee is 1% of the value of guarantee or the actual amount charged, whichever is higher.
Which sectors are facing tax liabilities to the tune of Rs 1,000 crore?
The power and real estate sectors are facing tax liabilities to the tune of Rs 1,000 crore.
What is the industry's plea regarding corporate guarantees?
The industry's plea is that giving guarantee is not a benefit or a supply of service that they are extending to their SPVs, but a 'necessity' for SPVs to remain operational.
What is the purpose of floating a special purpose vehicle (SPV) in the energy and real estate sector?
The purpose of floating an SPV is to extend funding to these entities, which are newly set-up and face challenges in raising funds.
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