India’s imposition of Goods and Services Tax (GST) on intragroup guarantees, effective from October 26, 2023, has caused significant disruptions in cross-border group financing strategies for multinational corporations with subsidiaries in the country. The amendment to the valuation rule, which determines the taxable value of supplies subject to GST, has shifted the landscape for these entities.
KEY POINTS:
Amendment Details
The amendment to the valuation rule now mandates the application of GST on intragroup guarantees, even in cases where no consideration is charged by the guarantor. This departure from previous industry norms, which considered such activities as “shareholder activities” exempt from GST, is a significant change.
Industry Impact
The imposition of GST on intragroup guarantees affects multinational corporations with subsidiaries and operations in India, particularly those in sectors like real estate, power, and infrastructure. These companies now face additional tax liabilities and compliance requirements.
Tax Treatment Shift
Despite previous income tax rulings treating intragroup corporate guarantees as shareholder activities, the Indian GST council has categorized them as services similar to bank guarantees. This classification subjects intragroup guarantees to an 18% GST rate, calculated as 1% of the guarantee amount or the actual consideration, whichever is higher.
Challenges for Foreign Companies
Foreign companies acting as guarantors for their Indian subsidiaries are now confronted with uncertainties regarding their tax liabilities and the overall impact on their financial structures. The GST notices issued to numerous corporate groups have triggered legal challenges, with writ petitions filed in various High Courts questioning the constitutional validity of these changes.
