Different GST authorities have adopted different approaches to taxing such guarantees. The report says senior officials have concluded that the taxable value should be fixed at 1% of the amount guaranteed, mirroring the valuation method adopted by the direct tax department.

In their desperation for revenue in a tight year, the tax authorities appear to be clutching at imaginary straws. GST is a value-added tax, levied on the value of the supply of a product or a service. Guarantees provided for loans to companies without any charge should not attract GST, no matter what clever valuation metrics the authorities conjure up. In economic theory, taxation is one form of exercising the state's monopoly and coercive powers. Still, it's time India started treating the GST as a tax that it is, not a form of legalised extortion.

We suggest that when the guarantee is provided without charge, the tax authorities should let it be, treating the value of the supply as zero and levying no tax.

This won't entail any loss of revenue for the department. After all, the company that receives the guarantee will claim an input tax credit on any GST it pays on the provision of the guarantee. If it pays no commission for the loan guarantee and does pay a GST on a free service, it will not claim input tax credit for unpaid GST. Levying a tax on a free service would only serve to create accounting complexity, without adding to the government's revenue or increasing public welfare.

Let's assume that all goods and services are taxed under GST, including the likes of petrofuels and alcohol, which are still outside the ambit of GST. In such an unbroken chain of value addition and tax, the final tax paid by a company turns out to be a tax on the value added by the company at the rate applicable on its final product or service. This is thanks to the way GST is structured, with each tax payment entitled to a credit for the tax already paid on inputs. This provides a simple way to check if a company is paying its GST dues in full or not.

Gross value added is gross profits minus wages and salaries. That the value added by a company breaks down into the sum of its return to capital and return to labour is an insight that may not be obvious to those who have not studied national income accounting. The value of all final goods and services, it turns out, is identical to the totality of income generated in the economy, accruing to capital and labour, thanks to this property. If the actual tax paid by a company, when divided by the GST rate on its final product or services, does not match the difference between its gross profits and the sum of wages and salaries, the company is playing accounting games to evade taxes.

Levying taxes on the presumed value of services that have been obtained for free upsets such cross-checking and should be avoided. When we use Google to search for something, it generates value but we do not pay for that value – at least not in cash. But the value that search generates reflects in our income, which is then subjected to tax.

In an economic sense, what is the value generated by a credit guarantee? It could be far out of proportion to the arbitrarily deemed 1% of the value of the loan. Without a guarantee from its parent company the subsidiary may not get a loan and do little business, or may get a loan at a risk premium. Just because the provision of this value is not taxed under GST, it does not mean the value it generates will escape taxation. It will reside in the enhanced profits of the subsidiary, which would attract corporate tax.

Let us accept that the tax base is the gross value added to the economy, which is equal to the value of the final goods produced and services offered. GST and income taxes target the same tax base, approaching it from different angles. It is not essential that every rupee of an economy's GVA is taxed twice over, once indirectly and once directly. If some elements of income avoid double taxation, we should welcome it as a small step towards the ideal of taxing value just once, but comprehensively