Corporate Guarantee to Sister Concern

Corporate Guarantee to Sister Concern


There is always a presumption that related party transactions are not at arm's length, so the provisions of tax provide that any transaction that takes place at the market value of a good or service and is based on common commercial terms will be viewed as one made with a third party.

The Transaction that has been made with related parties have always been subjected to perusal which is why a demonstration is needed for them that the transactions are made for commercial purposes. In this context, the related party can be a subsidiary or sister concern of the business.

Correspondingly, there are some guidelines and definitions prescribed by the GST regime, in the context of the related person to a business, especially as described under GST in respect of transactions with related persons. 

Who Are Related Persons or Sister Concerns? 

Central Goods and Services Tax Act introduces the provisions under section 15 for the related person. As per the aforementioned section, a person will be considered a related person if the following conditions are satisfied: 

  1. Any such persons are directors or officers of each other's business
  2. Any such person is legally a partner in the business 
  3. Any such people are employees and employers in the same business 
  4. Any such person who is directly or indirectly controlling the business or holds 25% of the shares in the company or both of the above. 
  5. Any of the people controls the other’s business directly or indirectly 
  6. Both of the persons are being controlled by a third person either directly or indirectly 
  7. Both the people control the third person directly or indirectly 
  8. Both persons are family members.

Issues In Guarantee Transactions:

According to Rule 2 of the Determination of Value of Supply Rules, goods and services supplied between related parties, excluding agents, are valued. In accordance with the aforementioned rule, the value of supply between the related parties shall be as follows; 

  1. A market value is provided for supply on the open market. 
  2. When there is no open market value of supply, then it will be the value of supply including quality and kind. 
  3. A value determined under the GST regime will only be determined by applying Rule 4 and Rule 5 when the provided mechanism is used. In Rule 2, it is provided with that 

In case the goods are to be further supplied by the recipient, the value will be determined by the supplier who provides the goods, which can be equivalent to 90% of the price already charged for the supply of goods of the same quality and kind by the recipient to the customer who is not related to him.

Additionally, where the recipient is eligible to receive a full input tax credit, the value declared in the invoice or bill will be deemed to be the market value.

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BY: Admin Tax4wealth

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