The Punjab & Haryana High Court has temporarily stopped a circular that made corporate guarantees subject to Goods and Services Tax (GST). This is good news for businesses because the circular was causing problems. 

The circular came from the Central Board of Indirect Taxes and Customs (CBIC) in October last year. 

It said that a holding company’s corporate guarantee to a bank or financial institution for credit to its subsidiary would be considered a ‘supply of service’ subject to GST, regardless of whether or not any consideration was involved. 

This raised questions about the value of corporate guarantees. 

The interim order allows companies who received show cause notices based on the circular to challenge them in court. 

If the holding company is outside of India, the Indian subsidiary is responsible for the GST demand. 

The circular caused a surge in show cause notices across all sectors, from FMCG to infrastructure. Mannat Waraich, who represented Acme Cleantech Solutions in this case, said that the stay applies across India. 

Companies that have received a show cause notice should immediately go to the High Court to cancel it. 

A corporate guarantee is like a safety net protecting the lender’s investment. When a borrower takes a loan, a guarantor, usually a holding company, promises to pay for it if the borrower can’t. 

This type of guarantee reduces the lender’s risk and increases the borrower’s credibility.