Corporate Guarantee Relief Unlikely to Benefit Realty and Power Firms: Experts

Experts indicate that the GST Council’s recent decision to provide tax exemptions on corporate guarantees in specific scenarios—such as transactions qualifying as “export of services” and recipients eligible for full input tax credit—may not alleviate the tax burdens faced by the power and real estate sectors, which are dealing with tax liabilities amounting to approximately Rs 1,000 crore.

Previously, the Council determined that the consideration for issuing a corporate guarantee would be 1% of the guarantee’s value or the actual amount charged, whichever is higher. An October 2023 notification enforced this, making GST applicable at a rate of 18% on corporate guarantees between parent companies and subsidiaries, as well as other related parties.

Following this enforcement, several infrastructure firms, including real estate and power companies, filed writ petitions challenging the 18% levy. According to an official source, 50-60 such companies have received tax notices since the GST Council’s decision in late October to tax these guarantees, with aggregate tax demands exceeding Rs 1,000 crore. Notable companies receiving these notices include DLF, IL&FS, Indiabulls Real Estate, and Supertech.

On Saturday, the Council proposed an amendment to Rule 28(2) of the CGST Rules, 2017, stating that valuation under these rules would not apply in cases of exporting such services (e.g., guarantees for a foreign subsidiary) and where the recipient is eligible for full input tax credit.

An expert noted that this amendment could ease compliance and record-keeping burdens and reduce fund blockages in certain cases. However, the amendment will still apply in situations where full input tax credit is unavailable to the recipient, leaving sectors like power and real estate seeking a reduced rate of deemed valuation.

Another expert pointed out that the two criteria do not include power and real estate companies, meaning their demand for exemption remains unmet. “Until the fine print of the amendment is released, we cannot conclusively say that the latest decision addresses the concerns of these sectors,” he added.

Many companies, particularly in the energy and real estate sectors, establish special purpose vehicles (SPVs) for each project. For funding purposes, the main entity must provide guarantees to financial institutions to secure funding for these SPVs. The industry argues that providing guarantees is not a benefit or service supplied to their SPVs but a “necessity” for SPVs to remain operational. As SPVs are newly established, raising funds is challenging, necessitating guarantees from Indian holding companies.