Introduction
A corporate guarantee is a common financial arrangement wherein one company undertakes to discharge the debt or obligation of another, typically in favor of banks or financial institutions. In the context of group companies, it is often the parent or holding company that provides such guarantees on behalf of its subsidiary or related entities. While traditionally viewed as a support mechanism within a corporate group, the introduction of the Goods and Services Tax (GST) has brought such arrangements under the tax lens. The critical issue is whether issuance of a corporate guarantee, particularly when no commission or fee is charged, constitutes a “supply” under GST and thereby attracts tax liability. Recent CBIC clarifications and judicial precedents have provided guidance on this matter, especially in cases involving related parties.
1. Background
- A corporate guarantee is when a company (the guarantor) assures repayment of a loan/fulfillment of an obligation of another company (the borrower) to a bank or lender.
- Under GST, issue arises whether providing such a guarantee (especially without charging any fee) amounts to a “supply of service.”
2. Relevant Provisions
- Section 7, CGST Act: Supply includes activities done for consideration, and certain activities even without consideration when covered under Schedule I (supply to related persons or between distinct persons in course of business).
- Schedule II, CGST Act: Declares activities to be treated as supply of goods or services – “agreeing to the obligation to refrain from an act, or to tolerate an act, or to do an act” → covers guarantees.
- Valuation Rules (Rule 28, CGST Rules): For supplies to related parties, value must be open market value or determined using prescribed rules.
3. Judicial / Administrative View
- CBIC Circular No. 204/16/2023-GST (27 October 2023): Clarified treatment of corporate guarantees:
- When given to related parties (without consideration): Taxable as supply under Schedule I.
- Valuation: As per Rule 28 – value deemed as 1% of the guarantee amount or actual consideration charged, whichever is higher.
- When given to unrelated parties (without consideration): Not considered supply, as not covered by Schedule I.
- Before this circular: There were disputes, with advance rulings (like in Edelweiss Financial Services Pvt. Ltd. AAR) treating corporate guarantees as taxable service even without consideration.
4. Practical GST Implication
- If Company A gives a corporate guarantee to a bank for a loan taken by its subsidiary/related party (Company B):
- Even if no guarantee commission is charged, it is treated as supply of service.
- Taxable value = 1% of the guarantee amount or actual consideration, whichever is higher.
- GST @ 18% will apply.
- Place of supply & credit eligibility depend on recipient’s registration and nature of business.
5. Summary
- ✅ Corporate guarantee to unrelated party without consideration → Not supply (outside GST).
- ✅ Corporate guarantee to related party without consideration → Supply under Schedule I; taxable.
- ✅ Valuation → 1% of guaranteed amount (or higher, if actual consideration charged).
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✅ GST Rate → 18% (as financial service).