Delhi HC to decide on taxability of corporate guarantees

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Vedanta Group's Sterlite Power Transmission. The appeal sought to declare corporate guarantees to subsidiaries non-taxable under the current tax regime. It also contested the valuation criteria set by the finance ministry for the purpose of taxing such guarantees when there is no financial consideration involved.

The court granted relief to the Vedanta group unit, restraining tax authorities from taking coercive action against the company before the high court passes its judgment. The next hearing is scheduled for 8 July. A corporate guarantee is usually given by a company on behalf of its subsidiaries or associates to lenders, guaranteeing that they will honour the debt if the borrowing company fails to repay.

This helps the borrowing company secure better terms from lenders. It is a common business practice, and the parent company generally takes no money for providing the corporate guarantee. However, tax authorities view providing such guarantees as a service liable for taxation under GST.

Under the GST law, services rendered to a related party for the furtherance of business are treated as a supply liable for taxation even if made without any consideration. The directorate general of goods and services tax intelligence (DGGI) has sent out a spate of tax demand notices to Indian companies related to corporate guarantees given by them on behalf of their subsidiaries. In October last year, the Central Board of Indirect Taxes and Customs (CBIC) issued a circular that clarified that in the case of such guarantees, when the parent company takes no financial consideration for providing the guarantee, a notional value equivalent to 1% of the guaranteed sum will be ascribed to it for the purpose of taxation.