Clarification on Taxability & Valuation of Corporate Guarantee between Related Parties
To clarify the taxability and valuation of corporate guarantee provided between related entities, the GST Council has made significant updates. These updates include the insertion of sub-rule (2) in Rule 28 of the Central Goods and Services Tax Rules, 2017 (CGST Rules) through Notification No. 52/2023-Central Tax dated 26th October 2023. Additionally, Circular No. 204/16/2023-GST dated 27th October 2023 provided further clarity on these changes. Following this, Notification No. 12/2024 dated 10th July 2024 amended sub-rule (2) of Rule 28 retrospectively from 26th October 2023. This circular aims to address various issues raised by trade and industry stakeholders regarding these provisions.
Clarifications on Key Issues:
1. Applicability of Sub-rule (2) of Rule 28:
Issue: Does sub-rule (2) of Rule 28 apply to corporate guarantees issued before 26th October 2023? Should GST be paid on “1% of the amount of such guarantee offered” for intra-group guarantees issued before this date?
Clarification: The service of providing corporate guarantees was taxable even before the insertion of sub-rule (2) on 26th October 2023. The sub-rule only specifies the valuation method. For guarantees issued or renewed before 26th October 2023, valuation should follow the Rule 28 provisions existing at that time. For those issued or renewed on or after this date, valuation must be as per Rule 28(2).
2. Valuation of Corporate Guarantees Linked to Loan Amount:
Issue: How to value a corporate guarantee when the loan is only partially availed or not availed at all? Can the recipient claim full Input Tax Credit (ITC) before the total loan is disbursed?
Clarification: The valuation of corporate guarantee services is based on the amount guaranteed, not the loan amount disbursed. The recipient can claim full ITC subject to the conditions in the Act and Rules, regardless of the loan disbursement status.
3. GST on Takeover of Existing Loans:
Issue: Is GST applicable again on the assignment of an existing corporate guarantee during a loan takeover?
Clarification: If a loan is taken over by another financial institution without issuing a new guarantee, there is no GST impact. GST is applicable only if a new or renewed corporate guarantee is issued.
4. Multiple Co-guarantors:
Issue: How is GST calculated when multiple entities provide a corporate guarantee?
Clarification: If multiple co-guarantors are involved, GST is payable on the total consideration or 1% of the guaranteed amount, whichever is higher. Each co-guarantor’s GST liability is proportional to their share of the guarantee.
5. Reverse Charge Mechanism for Intra-group Guarantees:
Issue: Can GST on intra-group corporate guarantees be paid by the recipient under reverse charge?
Clarification: Domestic corporate guarantees are subject to GST under the forward charge mechanism, and the supplier must issue an invoice. For guarantees provided by foreign entities to Indian entities, GST is payable under the reverse charge mechanism by the Indian recipient.
6. Tax Liability Discharge Frequency:
Issue: Should GST on corporate guarantees be paid annually, monthly, or one-time for guarantees issued for multiple years?
Clarification: GST on corporate guarantees is based on 1% of the guaranteed amount per annum or the actual consideration, whichever is higher. For guarantees issued for multiple years, GST is payable on the cumulative value (e.g., 5% for a five-year guarantee) at issuance. For shorter periods, it is proportionate to the duration.
7. Application of Invoice Value as Open Market Value:
Issue: Is the benefit of the second proviso to sub-rule (1) applicable under sub-rule (2)?
Clarification: A similar proviso has been inserted in sub-rule (2) to allow the invoice value to be deemed the open market value when full ITC is available to the recipient.
8. Export of Corporate Guarantee Services:
Issue: Does Rule 28(2) apply to the export of corporate guarantee services between related persons?
Clarification: The amended sub-rule (2) does not apply to services where the recipient is located outside India, making it inapplicable to the export of such services.
These clarifications aim to ensure uniform implementation across all formations and provide clear guidance to stakeholders on the taxability and valuation of corporate guarantee services under GST.
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