The Central Board of Indirect Taxes and Customs (CBIC) has said that Goods and Services Tax (GST) will apply to corporate guarantees between related entities such as parent firms and subsidiaries from Thursday, 26 October. The order gives effect to the decision announced by the GST Council on 8 October.
As per the CBIC order, 18% GST will apply to corporate guarantees between parent and subsidiaries and other related parties either on the financial consideration charged by the guarantor for that service, or 1% of the value of the guarantee, whichever is higher.
Experts said that this modification of the GST rule will have no impact on transactions executed prior to 26 October.
The council had also announced that in the case of corporate guarantees issued to a bank by a director against loans sanctioned to a company, and where no fee is paid to the director for that service, no GST would apply.
Experts said that while the rule change is meant to facilitate trade, many other important issues remain open for discussion. For instance, there is no clarity on the periodicity of GST payments on corporate guarantees – monthly, annually, or one-time – said Vivek Baj, partner at Economic Laws Practice, a law firm.
As the new rules takes effective from Thursday, it will be interesting to see how pending disputes unfold, he added. It will also be interesting to see how corporations adapt to the new valuation for future Guarantees.
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