Valuations of Corporate Guarantee

In the January 2024 issue of the BCAJ, we have examined the fundamental concepts of guarantee and the tax challenges hovering over corporate guarantees. It was acknowledged that mere legislative insertion of valuation rules by the 52nd GST Council does not put to rest the question over taxability of such corporate guarantees between related persons. On an application of the provisions of the Contract Act, one could have firmly viewed it as a rendition of service (if at all) by the Surety to the Principal Creditor and the flow of consideration (being the financial loan / assistance) by such Creditor to the Principal Debtor. Therefore, the service was being rendered by Parent Companies to the Banks / FIs (as a principal creditor) rather than its related entity (also emerging from CBIC Circular No. 204/16/2023-GST). The revenue’s interpretation of invoking the deeming fiction of Schedule I between related persons seemed to be misplaced. The true nature of contract between Surety and Principal Debtor (being related entities) is that of an implied ‘contract of indemnity’ where the debtor is bound to indemnify any loss which the surety may incur in case the guarantee was invoked by the Principal Creditor.

The 53rd GST Council has once again overlooked the fundamental principles of Corporate Guarantees and has tweaked the valuation rules on the mistaken understanding that the transac