By Sunil Gabhawalla | Rishabh Singhvi | Parth Shah, Chartered Accountants
Business Conglomerates fund their SPVs, subsidiaries, joint ventures, etc., with self-generated capital and / or leveraged capital. The downstream entity may not be capable of attracting debt capital based on its own net-worth and would require an intervention of the parent entity to guarantee such debt. In many cases, they are also issued to notch-up the credibility of the debt entity and reduce the cost of debt capital.
These Guarantees are reported in the financial statements (as contingent liabilities), Transfer pricing reports (as international transactions), Bank sanction letters and have caught the taxman’s eye of a possible revenue leakage, creating significant litigation under the Direct and Indirect Taxes domain. Therefore, it would be apt to unravel the concept of Guarantees, their forms / types, and the tax exposure they carry under the GST law.
COMMERCIAL UNDERSTANDING
Guarantees are contracts which grant the financier of capital the “assurance” over the repayment capacity of the borrower and carry an “obligation” to make good any default by the borrower entity. In many cases, promoters / directors of the Company (being the deployers of the capital) are also roped into the financial arrangement and made personally liable in case of any default. Such guarantees may also be backed with realisable s
