The goods and service tax of 1 per cent will be applicable on the Corporate Guarantee fee on an annual basis and will be applicable from October 23, 2023, a notification has said.

However, tax experts said the rules notified by the Central Board of Indirect Taxes and Customs (CBIC) following the decision on corporate guarantees in the GST Council meeting on June 22 were “draconian and results into significantly higher cost” and are “detrimental to taxpayers”.

“The value of supply of the service of providing a corporate guarantee to a banking company or a financial institution on behalf of a related recipient shall be 1 per cent of the amount guaranteed per annum or the actual consideration, whichever is higher,” the circular said.

Ranjeet Mahtani, partner, Dhruva Advisors, said: “The clarification circular is mostly detrimental to taxpayers. In the course of 2024, writ petitions have been lodged in several High Courts across India.

“The present clarifications should well be expected to cultivate some more litigation. It is wholly disproportionate that GST is required to be paid on the guaranteed base amount, irrespective of the drawn amount (disbursement) or, quantum of actual default.”

“The clarification that GST will have to be paid on the action of guarantee extended, without regard of the quantum of actual benefit (and thereby risk of default) appears incongruent.”

“Taking of risk is the taxable event, i.e. supply, and so, the clarification to pay tax on the guaranteed amount, for the entire tenure of the arrangement (as many years it remains valid for) does not square with the taxable event,” he said.

“The circular illustrates that if the corporate guarantee is for a period of five years (and periodic renewal is not required), then the supplier of the corporate guarantee is obliged to pay GST at the rate of 1 per cent of the guarantee amount multiplied by five,” Mahtani added.

Harsh Shah, partner, Economic Laws Practice, said: “This amendment is draconian and results into significantly higher cost, especially when there are restrictions on credits such as real estate and power. The concept of SPVs is very common in both these sectors and thus the need for issuance of corporate guarantees for the SPVs. Additionally, the fact that 5 per cent may be required to be paid upfront in the given example also results into cash flow issues.”