Introduction
The Central Board of Indirect Taxes and Customs issued a Circular No. 225/19/2024-GST,[i] (‘Circular’) dated 11.07.2024, which clarified the taxability and valuation of supply of services of providing corporate guarantee between related persons, considering the retrospective amendment with effect from 26.10.2023 in r. 28(2) of Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) vide Notification No. 12/2024-Central Tax[ii] (‘Notification’) dated 10.07.2024. This Circular deals with the industry concerns regarding the applicability of r. 28(2) of the CGST Rules, under the Central Goods and Services Tax Act, 2017 (‘Act’), which imposes tax liabilities on the service providers providing corporate guarantees to banking companies and financial institutions.
Issue-wise clarifications as per the Circular
Date of Implementation:
The Circular clarified that the valuation of the supply of services of providing a corporate guarantee, if issued or renewed before 26.10.2023, is to be done in accordance with r. 28 of the CGST Rules. The valuation of the supply of services providing a corporate guarantee, issued or renewed after 26.10.2023, is to be evaluated as per r. 28(2) of the CGST Rules.
Valuation of supply of services providing corporate guarantee and eligibility of recipient to avail full Input Tax Credit:
This Circular also clarified that the value of the supply of services by providing a corporate guarantee is to be calculated solely on the basis of the amount guaranteed in such services and not on the actual loan amount disbursed to the recipient of the services. It was further clarified that the recipient of services shall be eligible to avail of full input tax credit (‘ITC’) irrespective of the actual disbursal of the loan or total amount of disbursal, subject to other conditions as specified in the Act and the CGST Rules.
Assignment of Corporate Guarantee:
The Circular clarified that the takeover of the existing loans by another banking /financial institution other than the banking/financial institution which had issued such loan falls outside the scope of providing a corporate guarantee to any banking/ financial institution and, therefore, such takeover will have no impact on goods and service tax (‘GST’). Whereas suppose there is an issuance of a fresh corporate guarantee or renewal of a previously issued corporate guarantee at the time of the takeover. In that case, it will attract GST under r. 28(2) of the CGST Rules.
Proportionate GST liabilities for more than one guarantor:
The Circular further clarified that when more than one corporate guarantor is providing the services of corporate guarantee, then the value of such services will be the sum of actual consideration paid/payable to the co-guarantors if it is higher than 1% of the corporate guarantee, whereas if the sum of actual consideration is less than the 1% of the corporate guarantee then each co-guarantor will be entitled to pay GST on 1% of the corporate guarantee provided by them. In other words, the guarantor’s GST liability is proportionate to their corporate guarantee.
Intra-Group Corporate Guarantee:
When the domestic corporate entity issues intra-group corporate guarantees, GST is to be paid under the forward charge mechanism, whereas if the foreign/ overseas entity provides such guarantee for a related entity in India, GST is to be paid under the reverse charge mechanism by the recipient of the service of corporate guarantee, i.e., the related entity in India.
Frequency of the discharge of tax liability on corporate guarantee:
The Circular also clarified that after the amendment vide Notification the value of the supply services of providing corporate guarantee to banking/ financial institutions on behalf of the recipient shall be 1% of the amount guaranteed per annum or the actual consideration, whichever is higher. Moreover, if the guarantee is provided for multiple years, the total GST payable is 1% of the guaranteed amount multiplied by the number of years the guarantee lasts or the actual consideration, whichever is higher. Further, if the guarantee is for less than one year, the tax will be calculated proportionately for that period or actual consideration, whichever is higher.
Valuation of when the recipient is entitled to ITC:
The Circular clarifies that as per the Notification if a corporate guarantee is issued or renewed on or after 26.10.2023, the valuation of the supply must be done as per the amended r. 28(2) of the CGST Rules, i.e., the value mentioned in the invoice will be considered the value of the supplied service.
GST payable for export of the service of corporate guarantee:
As per the Notification, r. 28(2) of the CGST Rules will not apply if the recipient is located outside India. In other words, the new rule on invoice value as service cost applies only to domestic transactions.
Conclusion
The Circular clarifies most uncertainties surrounding the valuation of corporate guarantees provided by related parties following the amendment to r. 28(2) of the CGST Rules. Businesses will appreciate guidance on pro-rating GST, and no fresh GST will be applicable on the takeover of existing financial obligations. However, valuing based on a full guarantee amount and upfront 1% annual valuation could raise the tax burden. While the circular offers welcome guidance on valuing corporate guarantees under the amended rule 28(2) of the CGST Rules, it leaves several key questions unanswered. These uncertainties surround the valuation of guarantees issued before the rule change, those used in export transactions, and those extended to institutions beyond traditional banking and financial institutions. Additionally, the process for valuing guarantees provided by non-corporate entities remains unclear. These unresolved issues will require further clarification to ensure consistent and efficient application of the GST law.
End Notes
[i] CBIC Circular No. 225/19/2024-GST, dated 11.07.2024.
[ii] CBIC Notification No. 12/2024-Central Tax, dated 10.07.2024.
Authored by Sanket Pisal of Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.
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