2023 GST Recap: Industry Expects Litigation On Corporate Guarantees To Rise

The 52nd GST Council met on Oct. 7 for the fourth time in 2023 and issued clarifications on topics ranging from rate exemptions, cuts and trade facilitation measures. One such clarification was that corporate guarantees would attract Goods and Services Tax, a move that has prompted debate on applicability, valuation and time period of liability.

According to legal experts, it is likely to be litigated next year. In this series, NDTV P. .

. The 52nd GST Council met on Oct. 7 for the fourth time in 2023 and issued clarifications on topics ranging from rate exemptions, cuts and trade facilitation measures.

One such clarification was that corporate guarantees would attract Goods and Services Tax, a move that has prompted debate on applicability, valuation and time period of liability. According to legal experts, it is likely to be litigated next year. In this series, NDTV Profit reached out to lawyers and corporate advisors to count down the significant legal developments in 2023 and what corporates need to be mindful of.

This is the second of a three-part series. Following the 52nd GST council meeting , it recommended that the corporate guarantee given by a parent to a subsidiary company or by a company director will be set at 18% GST on 1% of the amount of such guarantee offered, or the actual consideration, depending on whichever is higher. In October, the ministry clarified the taxability when such guarentees are given without a consideration value.

However, related-party transactions like corporate guarantees still have many open-ended issues even after the ministry’s clarification, according to Ritesh Kanodia, an indirect tax partner at Aurtus Consulting. Industries have been told to pay 18% GST at 1% of the amount guaranteed, but whether this would be the case for the past period and whether GST will be applicable on 1% of the total loan amount guaranteed or only the utilised amount are ongoing debates. Some of these concerns have begun to emerge in a few ongoing show cause notices issued.

Sudipta Bhattacharjee, a partner for indirect taxes at Khaitan & Co. said that the regional Directorate General of GST Intelligence have initiated many investigation cases, prompting more litigation with some parties poised to approach the high courts regarding the valuation norm. “We have seen some action but we will see a lot more in the next few months.

Investigations and notices have commenced and they could intensify further. I suspect in the next 3-6 months, some cases will reach the high courts,” he told NDTV Profit. Will ESOPs Face Tax Liability? Another related-party concern, according to Bhattacharjee, is the taxability of ESOPs where ambiguity over whether shares received by an employee could be treated as a service.

“ESOPs are a common employment incentive, particularly in startups now, and though the concern is not very big yet, it will be a pertinent matter in the next 3-4 months as it is very much on the department’s radar,” he said. If a foreign parent company issues ESOPs to employees in its Indian subsidiary, the issue is whether the reimbursement by the Indian company for such ESOPs would be liable to GST. Presently, the department’s perspective is that it is a consideration for a service rendered between the two parties and the Indian company is liable to pay GST under reverse charge mechanism, Kanodia said.

RCM refers to when the GST is paid directly by the receiver instead of the supplier. “It is our view that there is no liability on payments made towards grant of ESOPs as the same is nothing but a transaction in securities, which is outside the GST ambit,” Kanodia said. It is important that the government clarify this aspect at the earliest to avoid unnecessary litigation, he said.

“In the past as well, on an issue relating to holding of shares, it was clarified that there would be no taxable service involved and consequently, such transactions will not attract GST. We expect a similar stand on the ESOP issue. ”.