Summary: Corporate guarantees are agreements where a holding company promises to pay for loans taken by its subsidiaries if they default. Under GST, corporate guarantees are taxable, as outlined in Rule 28 of the CGST Rules, 2017. The value of these guarantees is typically set at one percent of the guaranteed amount per annum or the actual consideration, whichever is higher. This provision applies even when no direct consideration is exchanged. Recent clarifications from the CBIC emphasize that the supply of corporate guarantees, even if made without consideration, is treated as a taxable service. If the recipient of the guarantee is eligible for full input tax credit, the invoice value is considered the supply value. The rules specify that this valuation method applies retrospectively from October 26, 2023, meaning that all corporate guarantees issued or renewed after this date must comply with these provisions. If a guarantee is provided for multiple years or renewed, GST is payable on each year based on the total guaranteed amount. Additionally, rules apply differently when guarantees are given by foreign entities to related Indian entities, involving reverse charge mechanisms for GST.
Introduction: Corporate guarantees are given by holding companies in favour of their subsidiaries. Under this mechanism, a company, known as the guarantor, promises to pay for a loan if the borrower (in this case, subsidiaries) doesn’t fulfill their obligations. This system benefits the subsidiaries in the form of reduced risk levels.
Rule 28 of CGST Rules, 2017 contains provision in relation to corporate guarantees.
A) Rule 28 of CGST Rules, 2017
According to Rule 28 of CGST Rules, 2017, Corporate Guarantees are taxable in GST. The updated relevant extract of Rule 28 (as amended upto July, 2024) is reproduced below:
28. Value of supply of goods or services or both between distinct or related persons, other than through an agent.-
1[(1)] The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall-
(a) be the open market value of such supply;
(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;
(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:
Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person:
Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.
2[(2) Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person 3[located in India], by way of providing corporate guarantee to any banking company or financial institution on behalf of the said recipient, shall be deemed to be one per cent of the amount of such guarantee offered 4[per annum], or the actual consideration, whichever is higher.]
5[Provided that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the value of said supply of services.]
NOTES:-
1. Re-Numbered vide NOTIFICATION NO. 52/2023 – Central Tax dated 26-10-2023
2. Inserted vide NOTIFICATION NO. 52/2023 – Central Tax dated 26-10-2023
3. Inserted vide Notification No. 12/2024 – Central Tax dated 10-07-2024 w.e.f. 26-10-2023
4. Inserted vide Notification No. 12/2024 – Central Tax dated 10-07-2024 w.e.f. 26-10-2023
5. Inserted vide Notification No. 12/2024 – Central Tax dated 10-07-2024 w.e.f. 26-10-2023
B) CBIC clarifications
√ CBIC vide Circular No. 204/16/2023-GST dated 27.10.2023 has clarified on taxability of personal guarantee and corporate guarantee on GST, i.e., personal guarantee and valuation of the activity of providing corporate guarantee by a related person to banks/financial institutions for another related person, as well as by a holding company in order to secure credit facilities for its subsidiary company.
√ Such activities shall be treated as supply of services even when made without consideration. In terms of rule 28 of the CGST Rules, the taxable value of such supply of service shall be the open market value of such supply.
√ When no consideration can be paid for the said transaction by the company to the director in any form, directly or indirectly, as per RBI mandate, there is no question of such supply/ transaction having any open market value. The open market value of the said transaction/ supply may be treated as zero and therefore, the taxable value of such supply may be treated as zero. In such a case, no tax is payable on such supply of service by the director to the company.
√ Where director who had provided guarantee is no longer connected with management but his guarantee continues and is offered remuneration, the taxable value of such supply of service shall be the remuneration/ consideration provided to such a person/ guarantor by the company, directly or indirectly.
√ In case of corporate guarantee to related persons, providing corporate guarantee by a holding company to the bank/financial institutions for securing credit facilities for its subsidiary company, even when made without any consideration, is also to be treated as a supply of service by holding company to the subsidiary company, being a related person.
√ Taxable value will be determined as per rule 28(2) of CGST Rules but Rule 28(2) shall not apply in respect of the activity of providing personal guarantee by the Director to the banks/ financial institutions for securing credit facilities for their companies.
√ CBIC vide Circular No. 225/19/2024-GST dated 11.07.2024 has issued clarification on various issues pertaining to taxability and valuation of supply of services of providing corporate guarantee between related persons.
√ Rule 28(2) of Rule 28 of CGST Rules has been amended retrospectively with effect from 26.10.2023 vide notification No. 12/2024 dated 10.07.2024.
√ CBIC clarifications inter alia, cover the following:
> Supply of service of providing corporate guarantee to any banking company or financial institution by a supplier to a related recipient, on behalf of the said recipient, was taxable even before the insertion of rule 28(2) of CGST Rules with effect from 26th October, 2023.
> If the corporate guarantee is issued or renewed on or after 26th October 2023, then the valuation of the said supply will be required to be done as per Rule 28(2) of CGST Rules.
> Value of supply of the service of providing a corporate guarantee will be calculated based on the amount guaranteed and will not be based on the amount of loan actually disbursed to the recipient of the corporate guarantee.
> Recipient of the service of providing corporate guarantee shall be eligible to avail the ITC, subject to other conditions irrespective of when the loan is actually disbursed to the recipient, and irrespective of the amount of loan actually disbursed.
> If the loan issued by the banking company/ financial institution is taken over by another banking company/ financial institution, the said activity of taking over of the loan does not fall under the service of providing corporate guarantee to any banking company or financial institution by a supplier to a recipient.
> In such cases, there will be no impact on GST, unless there is issuance of fresh corporate guarantee or there is a renewal of the existing corporate guarantee.
> If the takeover of the loan is followed/ accompanied by issuance of fresh corporate guarantee, then GST would be payable on the same.
> In cases where corporate guarantee is being provided by multiple related entities, the value of such services of providing corporate guarantee shall be the sum of the actual consideration paid/ payable to co-guarantors, if the said amount of total consideration is higher than one per cent of the amount of such guarantee offered.
> Where the sum of the actual consideration is less than one per cent of the amount of such guarantee offered, then GST shall be payable by each co-guarantor proportionately on one per cent of the amount guaranteed by them.
> In cases where such guarantee is provided by the foreign/ overseas entity for a related entity located in India, then GST would be payable under reverse charge mechanism, by the recipient of service, i.e., the related entity located in India.
> Value of supply of the service of providing corporate guarantee to a banking company or a financial institution on behalf of a related recipient shall be one per cent of the amount guaranteed per annum or the actual consideration, whichever is higher.
> The value of supply of the service of providing corporate guarantee to a banking company or a financial institution on behalf of a related recipient for a particular number of years shall be one per cent of the amount of such guarantee offered multiplied by the number of years for which the said guarantee is offered or the actual consideration whichever is higher.
> Where the corporate guarantee is provided for a period less than a year, say 6 months (half a year), then in those cases as well, the valuation may be done on proportionate basis for the said period.
> If a corporate guarantee is issued, say for a period of one year and is renewed five times, for a period of one year each, then tax would be payable on one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher, on the issue of such corporate guarantee in the first year as well as on every renewal in subsequent years.
> In cases involving the supply of service of corporate guarantees provided between related persons, where full input tax credit is available to the recipient of services, the value declared in the invoice shall be deemed to be the value of supply of the said service.
> The provisions of the rule 28(2) will not apply in cases where the recipient of the services of providing corporate guarantee between related persons is located outside India. Accordingly, the provisions of the said sub-rule shall not apply to the export of the services of providing corporate guarantee between related persons.
C) Epilogue
- e.f. 26.10.2023, valuation of corporate guarantee GST will be applicable and calculated as per rule 28(2) of CGST Rules, 2017. Prior to the insertion of the said sub-rule 28(2), i.e., before 26th October 2023, the valuation of service of providing corporate guarantee was to be done as per the provisions of Rule 28 of CGST Rules, as it existed then.
- e.f. 26.10.2023, GST is payable on commission on per annum basis or on each renewal. To illustrate the same, if a corporate guarantee is issued for a period of say five years, then the value of such guarantee is to be calculated at one per cent per year of the amount of such guarantee offered, or the actual consideration, whichever is higher, i.e., the value of such corporate guarantee provided would be 5% of the amount guaranteed or the actual consideration, whichever is higher. Therefore, GST would be payable on such amount at the time of issuance of such corporate guarantee, i.e., 5% of the amount guaranteed or the actual consideration, whichever is higher. However, if a corporate guarantee is issued, say for a period of one year and is renewed five times, for a period of one year each, then the tax would be payable on one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher, on the issue of such corporate guarantee in the first year as well as on every renewal in subsequent years.
- The proviso of Rule 28(2) enables the supplier to charge even a lower than 1 percent consideration (value as declared in the invoice) and that would be acceptable if full input tax credit is available to the recipient as such a proviso carves out the exception to the main rule.
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