New battleground in tax disputes

GST on corporate guarantees is likely to be shaped in courtrooms rather than in policy chambers: Experts

- MONIKA YADAV

In October 2024, Jindal Stainless challenged a Goods and Services Tax (GST) notice in the Delhi High Court. It was about corporate guarantees issued to related parties by its former group company, Jindal Stainless (Hisar), before their merger in March 2023.

The tax department argued that these guarantees -extended to banks and financial institutions qualified as a "supply of services" under GST law, making them liable to 18 per cent tax.

Jindal Stainless contested the taxability of such guarantees, especially when issued without any consideration, and challenged the retrospective application of new rules and circulars. The Delhi High Court granted interim protection against coercive action, and the case has since become a reference point for the growing legal uncertainty surrounding GST on corporate guarantees. These guarantees, though traditionally used as internal financial support within corporate structures, have now come under intense scrutiny, raising alarm across industries.

The backdrop

In the business world, corporate guarantees serve as a routine internal mechanism. They allow group entities to support one another, often enabling subsidiaries to raise loans or obtain credit lines with the backing of a stronger parent company. These transactions typically happen without monetary consideration.

However, under India's GST law, they have become a subject of legal uncertaint leading to disputes and concerns among companies and tax experts.

Before the introduction of GST in 2017, corporate guarantees between related parties were not considered taxable under the service tax regime, unless there was a direct and significant consideration involved.

Businesses could extend guarantees internally without fear of tax liability, especially in cases where the guarantee was issued.