GST muddle on corporate guarantees betrays desperation for tax revenue

livemint.com:

This Saturday’s meeting of the GST Council is likely to provide clarity on how to levy GST on bank guarantees that companies give to related parties, reports Business Standard. Different GST authorities have adopted different approaches to taxing such guarantees. The report says senior officials have concluded that the taxable value should be fixed at 1% of the amount guaranteed, mirroring the valuation method adopted by the direct tax department.

In their desperation for revenue in a tight year, the tax authorities appear to be clutching at imaginary straws. GST is a value-added tax, levied on the value of the supply of a product or a service. Guarantees provided for loans to companies without any charge should not attract GST, no matter what clever valuation metrics the authorities conjure up.

In economic theory, taxation is one form of exercising the state's monopoly and coercive powers. Still, it's time India started treating the GST as a tax that it is, not a form of legalised extortion. We suggest that when the guarantee is provided without charge, the tax authorities should let it be, treating the value of the supply as zero and levying no tax.

This won’t entail any loss of revenue for the department. After all, the company that receives the guarantee will claim an input tax credit on any GST it pays on the provision of the guarantee. If it pays no commission for the loan guarantee and does pay a GST on a free service, it will not claim input tax credit for unpaid GST.