Indian GST on Cross-Border Financing Impacts Offshore Guarantors

India imposed goods and services tax on intragroup guarantees with effect from Oct. 26, 2023 through an amendment to the valuation rule, which determines the taxable value of supply on which GST applies. This is set to cause a massive upheaval in the way cross-border group financing works for groups with subsidiaries and operations in the country.

This is because it applies even when no consideration is charged by the guarantor, and is a departure from the earlier industry practice of not paying GST on such activities—which were viewed as being in the nature of “shareholder activities” rather than “services.”

Despite several rulings on the income tax front treating intragroup corporate guarantees as a shareholder activity, the Indian GST council seems to be keen on treating this as akin to services rendered by banks while issuing bank guarantees.

This has led to the imposition of 18% GST on “1% of the amount of such guarantee offered, or the actual consideration, whichever is higher.”

This raises several questions for foreign companies standing as a guarantor for their Indian subsidiaries.

Further, GST notices have been issued to numerous corporate groups—particularly in the real estate, power, and infrastructure sectors—seeking to levy GST on intragroup corporate guarantees. In response to such notices, several groups (for instance, Sterlite Industries and GVK Power) have filed writ petitions before various High Courts challenging the constitutional validity of these changes.

Ideally, the government should reconsider the approach toward taxing corporate guarantees and align it with global standards—for instance, the OECD transfer pricing guidelines specifically exclude such “shareholder activities” from the purview of “intragroup services.”

Key Questions for Multinationals

Typically, GST is payable only when there is consideration paid for any services rendered by a supplier of services. However, where such services are rendered between group entities, GST is applied at market value with a view to prevent any loss of GST collection on such supplies. This is because supplies between group entities are typically undertaken for free or at less than market value.

Judicial precedents under the previous service tax regime have held that the issuing of an intragroup corporate guarantee without consideration shouldn’t constitute a taxable “service.” Similarly, judicial precedents under income tax laws have held that the issuing of an intragroup corporate guarantee may be in the nature of shareholder activity rather than services.

However, imposing GST through an amendment to the valuation of supply rules appears to be based on an assumption that this activity qualifies as a taxable supply, which could leave it open to challenge before the courts in the future.

It is also unclear whether the amended valuation rule will apply to intragroup corporate guarantees issued before Oct. 26, 2023—the date when the amended rule comes into effect—that continue to be in force after this date.

Retrospective imposition of the amended rule would mean potential liability for back taxes for offshore guarantors and their Indian group entities, and penalties.

It’s also unclear whether the deemed consideration (1% of the guarantee offered) should be split over the life of the guarantee—for instance, if it is a five-year guarantee, should it be equal amounts paid in installments each year—or should GST be payable on the entire amount at the time when the guarantee is entered into (on signing the contract), triggered (on invocation), or terminated (on concluding the “supply” of service).

Further, where guarantees are uncapped—often the case in cross-border guarantees—the valuation rule arguably fails, as the tax base is then 1% of an unknown amount.

Where the corporate guarantee is provided by more than one guarantor—since many guarantees issued are on a joint and several basis—it remains unclear whether the GST cumulatively payable by all the guarantors may be capped at “1% of the amount of such guarantee offered, or the actual consideration.”

Transfer pricing issues for offshore guarantors. Generally, remittances made to parties outside India should be in accordance with Indian exchange control laws, withholding taxes, and transfer pricing. Where payments of GST by the borrower in India on behalf of an offshore guarantor are made as required under GST laws, this could lead to further scrutiny of the offshore guarantor’s Indian operations.

This could potentially relate to transfer pricing under income tax laws because of a mismatch between declared revenue amounts in the GST returns of the borrower and the income tax return of the guarantor, as the notional guarantee fee on which GST is paid isn’t an actual receipt in the hands of the guarantor.

This may raise questions on compliance with exchange control laws for timely remittance of such amounts, which stipulate a nine-month time limit, and potential withholding tax and secondary adjustment consequences, which apply when a payment is notionally due by the borrower to the guarantor.

Other potential issues. Further, the group entities are required to discharge GST without receiving any actual consideration, suffer the additional compliance burden, and incur permanent tax costs for which credits may not be available in sectors such as renewable energy or infrastructure, as the output supplies are outside the scope of GST.

Domestic corporate borrowers guaranteed by offshore guarantors would be at a further disadvantage compared with those borrowers with onshore guarantors. While GST is typically discharged by the guarantor and not the borrower, in the case of domestic corporate borrowers guaranteed by offshore guarantors, such GST would need to be discharged by the domestic borrower under reverse charge.

Way Forward

Cross-border financing, which is a key part of the Indian growth story, would be impacted by this levy as the cost of fundraising goes up.

To assess the potential impact, corporate groups should determine whether the group entities to such arrangements are likely to qualify as “related persons” for GST purposes—this would depend on whether one of them “controls” the other or whether both are “controlled” by a third person. This can be ascertained from the contract between the parties and other factors such as equity participation and voting power.

Offshore entities should also review any intragroup arrangement with Indian entities as such transactions are undergoing heightened scrutiny.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Meyyappan Nagappan is partner at Trilegal.

Joseph Jimmy is partner at Trilegal.

Shweta Mallya is an associate at Trilegal.

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