GST Council To Levy 18% GST On Corporate Guarantee For Group Cos; Cut Tax On Molasses To 5 pc

The GST Council on Saturday clarified that guarantees provided by corporates to their subsidiaries will attract an 18 per cent GST, but no tax will be levied on the personal guarantee given by a director of a company raising loans from the market.

The council, chaired by Union Finance Minister Nirmala Sitharaman and comprising state ministers, also decided to cut the GST rate on molasses to 5 per cent from 28 per cent, and capped the maximum age for appointment of President and members in the GST appellate tribunal (GSTAT) at 70 years and 67 years, respectively.

The council also ceded the right to tax Extra Neutral Alcohol (raw product for making alcohol for human consumption) to states.

Accordingly, ENA used for human consumption will be exempt from Goods and Services Tax (GST) and states can continue to levy VAT. ENA for industrial use will continue to be taxed at 18 per cent under the GST.

Briefing reporters after the 52nd GST council meeting, Sitharaman said the reduction in GST on molasses will benefit sugarcane farmers and enable their dues to be cleared faster because more money will be left in the hands of the mills.

"The council and we all feel that it will also lead to a reduction in the cost of manufacturing cattle feed, which will be a major development," she said.

Revenue Secretary Sanjay Malhotra said the council has decided that when the corporate guarantee is given by a director to a company, then the value of service will be deemed to be zero and hence, no GST will be applicable.

"When a corporate guarantee is given by a company to its subsidiary company, then it will be deemed that the value is 1 per cent of the corporate guarantee. So, it will attract GST at 18 per cent on 1 per cent of the total amount guaranteed by the parent company," Malhotra said.

Tax experts, however, wanted clarity on GST levy on past transactions as many companies might not be able to recover the tax from subsidiaries or group companies.

EY Tax Partner Saurabh Agarwal noted that although the council decision would bring certainty to the taxation regime, however, certain industries, such as power and utility, petroleum, agricultural, and real estate, could be negatively impacted by the said recommendation.

"It will need to be seen how the said levy will get aligned to the terms of the lending agreements, which sometimes prohibit charge of any consideration for corporate guarantee by the holding company from its subsidiary company.

"The impact of the levy of GST on corporate guarantees on other legislations, such as income tax and corporate laws, would need to be seen. It is important to ensure that there is no conflict between the different legislations,” Agarwal said.

The GST Council also decided to levy a lower 5 per cent tax on millet-based flour when sold in pre-packaged and labelled form.

Flour, containing at least 70 per cent millets, will attract zero per cent GST if sold loose and 5 per cent if sold pre-packaged and labelled.

The council also decided to cap the maximum and minimum age of GST Appellate Tribunal (GSTAT) president and members.

The GSTAT President will have a maximum age cap of 70 years, while the limit for members will be 67 years.

This is a change from the earlier age limit of 67 and 65 years, respectively, for the GSTAT President and members.

The minimum age for appointment would be 50 years. Also, an advocate with up to 10 years of experience in litigation under indirect tax laws would be eligible for judicial member in the tribunal.

With regard to online gaming, on which the council had in its previous two meetings clarified a 28 per cent tax on full face value, states like Delhi and Goa raised the issue of GST show-cause notices being sent to companies.

The revenue secretary informed states that the 28 per cent levy was applicable to e-gaming, casinos and horse racing from the beginning and notices are being sent accordingly.

"Certain (GST council) members raised the issue of retrospective taxation. It was informed to them that this is not retrospective, and this was the law earlier. These liabilities were already existing because money online games played with bets...they were already attracting (28 per cent GST) by way of betting or gambling," Malhotra said.

Talking to reporters after the council meeting, Delhi Finance Minister Atishi said tax notices for the past 6 years, calculated at a 28 per cent GST rate, are being sent to online gaming companies, even though this rate was to be implemented from October 1.

"An industry whose revenue is Rs 23,000 crore you are slapping a tax notice of Rs 1.5 lakh crore. This will kill the (online gaming) industry. This shows an unsafe erratic investment environment in Indian startups," Atishi said.