Archive · 25 Jun 2025
Tax Disputes: Corporate Guarantees Become New Battleground
Imagine a company helping its subsidiaries get loans by promising to pay if the subsidiary can't.
The government now wants to tax these promises, called corporate guarantees.
They say it's like providing a service.
Companies disagree, especially if they can't claim back the taxes they pay.
New rules mean they might owe a tax every year, even if the guarantee is never used.
This has caused arguments between businesses and the government, with some going to court to challenge the tax.
Jindal Stainless challenged a GST notice regarding corporate guarantees, sparking legal uncertainty.
The tax department views corporate guarantees as 'supply of services' subject to an 18% GST.
New rules assess guarantees at 1% of the amount annually, leading to tax burdens even if not invoked.
Companies, especially those with limited Input Tax Credit (ITC), are contesting the taxability and valuation.
The government defends its stance, while legal experts and companies argue against the tax's validity.
- Who
- Jindal Stainless, other companies, tax department, and legal experts.
- What
- A legal dispute over Goods and Services Tax (GST) on corporate guarantees.
- When
- October 2024 (initial challenge); Amendments in 2023 and 2024.
- Where
- Delhi High Court and various other High Courts.
- Why
- To clarify and enforce taxation on corporate guarantees, which has led to disputes due to ambiguity and valuation methods.
Corporate/Legal Experts
Tax Authorities/Government
Taxability of Corporate Guarantees
Corporate/Legal Experts
Corporate guarantees should not be considered as taxable services; they function as shareholder duties.
Tax Authorities/Government
Government: Corporate guarantees between related persons are subject to GST, as they are services.
Valuation Method
Corporate/Legal Experts
The valuation method of 1% per annum is arbitrary and leads to excessive tax burdens.
Tax Authorities/Government
Government: Valuation and the 1% rate are legally justified and seek to close loopholes in tax collection.
Compliance and Applicability
Corporate/Legal Experts
Authorities are demanding tax even in cases where recipients can claim full Input Tax Credit (ITC), which is a wrong interpretation of Rule 28(2).
Tax Authorities/Government
Authorities: The government stands firm that tax can be levied on corporate guarantees as per the rules.
- Tax in Question
- Goods and Services Tax (GST)
- Subject of Dispute
- Corporate Guarantees
- GST Rate
- 18%
- Valuation Rule
- 1% per annum of the guarantee amount
- Legal Status
- Ongoing litigation in multiple high courts
- Relevant Act
- CGST Act (specifically Schedule I)