Clarification on GST for Corporate Guarantees: Annual Charge and Valuation Challenges

Recent GST notifications have clarified that the 1% charge on corporate guarantees between related parties is applicable annually, rather than for each transaction. This clarification is part of a series of notifications issued by the Central Board of Indirect Taxes and Customs (CBIC) on July 10, implementing recommendations from the 53rd GST Council meeting held in June.

According to the notification, companies can avoid this charge if they claim full tax credit and exclusively deal with taxable goods and services. However, experts warn that businesses earning even a small portion of exempt income will still face challenges in valuing guarantees for tax purposes. They are calling for further guidance to address issues faced by companies with mixed taxable and exempt income.

A tax expert stated, “The tax treatment of corporate guarantees under India’s GST has been confusing. The recent CBIC notification clarifies that the 1% GST charge applies annually, not per transaction. Companies claiming full tax credit on purchases won’t incur taxes on guarantees if they only deal with taxable goods and services, which simplifies the situation for many.”

“However, businesses with even a small portion of exempt income (around 2-3%) will need to determine the value of the guarantee for tax purposes, leading to potential inconsistencies. Overall, this is a positive step toward clarity on taxes related to corporate guarantees, but additional guidance is necessary to resolve valuation issues for those with mixed income streams,” he added.

Additionally, new provisions allow manual filing of appeals with the Registrar’s permission, accommodating situations where the online portal is inaccessible. A minimum filing fee of Rs 5,000 has also been established, providing clarity and structure to the appeals process.

“This development is a positive step, offering flexibility for exceptional cases while also setting a clear financial threshold for appeals,” the expert noted.

Moreover, amendments have been made under the Central Goods and Services Tax Act, 2017 (CGST Act), empowering the Central Government to notify tax rates for supplies made through electronic commerce operators. This includes a reduction in the TCS rate from 1% to 0.5%. The central government also exempted taxpayers with an aggregate annual turnover of up to Rs 2 crore from filing the annual return in FORM GSTR-9/9A for the financial year 2023-24.