GST Implications on Corporate Guarantees Extended to Foreign Related Parties: Export of Service or Deemed Supply?
In today’s interconnected global economy, Indian multinational companies often extend corporate guarantees to banks on behalf of their foreign subsidiaries or related parties. While this practice aids in securing credit facilities abroad, it also brings complex implications under the Goods and Services Tax (GST) regime in India. This article analyses the GST treatment of such corporate guarantees, particularly where no consideration is received from the foreign entities.
Nature of the Transaction: Supply or Not?
Under Section 7(1) of the Central Goods and Services Tax (CGST) Act, 2017, a transaction is considered a “supply” only if it is made for a consideration in the course or furtherance of business. At first glance, a corporate guarantee extended gratis by an Indian company to its foreign related party would fall outside the ambit of this definition due to the absence of consideration.
However, Schedule I of the CGST Act overrides this general principle by deeming certain transactions between related persons as supplies even if made without consideration. The corporate guarantee in question, extended to a related party (foreign subsidiary or affiliate), falls squarely within this deeming provision.
Valuation and Taxability
Once the activity is deemed a supply, the next question concerns its valuation. Rule 28(1) of the CGST Rules, read with Section 15 of the CGST Act, provides that the value of such supply shall be the open market value. In the absence of open market comparables, alternative valuation methods such as cost-based or residual methods may be applied.
Given that the supply is made to a foreign entity, the Indian company may discharge Integrated GST (IGST) either by payment of tax or under a Letter of Undertaking (LUT), as per Section 31 of the CGST Act.
Export of Service: The Contention
Section 2(6) of the Integrated Goods and Services Tax (IGST) Act, 2017 defines “export of services” as a supply meeting all five of the following conditions:
1.Supplier is located in India;
2. Recipient is located outside India;
3. Place of supply is outside India;
4. Payment is received in convertible foreign exchange or Indian Rupees as permitted by RBI;
5. Supplier and recipient are not mere establishments of the same person.
In the case of a corporate guarantee to a foreign related party:
- Conditions 1, 2, 3, and 5 are clearly satisfied.
- However, the fourth condition—receipt of payment in convertible foreign exchange—is not met, as no guarantee fees or other consideration is received by the Indian company.
This leads to a nuanced debate: Can a transaction be deemed an “export of service” when consideration is neither expected nor received?
General vs. Specific Provisions: A Legal Interpretation
The CGST framework contains both general provisions (Section 7 and Section 2(6)) and specific deeming provisions (Schedule I). It is a well-established principle of legal interpretation that special provisions override general provisions in case of a conflict.
Here, the taxability arises solely by virtue of Schedule I—a special provision—which deems the transaction a supply even without consideration. The general requirement of foreign currency realization under Section 2(6) should not negate the specific intent of the law to tax such related-party transactions.
Hence, one may argue that since:
- The transaction is deemed a supply under Schedule I,
- GST has already been discharged (with or without LUT),
- And there was no commercial expectation of monetary consideration,
the non-receipt of foreign exchange should not disqualify the transaction from being treated as an export of service.
Seeking Clarity from Authorities
Given the ambiguity and lack of specific guidance from the GST Council or CBIC on this matter, businesses are left in a grey zone. To ensure compliance and avoid future litigation, taxpayers should consider:
- Seeking an advance ruling from the jurisdictional Authority for Advance Rulings (AAR),
- Or submitting a representation to the CBIC requesting a clarification or circular on this issue.
Conclusion
The Indian company’s action of providing a corporate guarantee to a foreign related party without consideration triggers tax liability only because of the deeming fiction under Schedule I. In such a scenario, the condition of foreign exchange realization under Section 2(6)—which presupposes a commercial consideration—should not be rigidly enforced.
A purposive interpretation of the law would suggest that such a deemed supply, already taxed, may be treated as an export of service for all practical purposes, including eligibility for LUT or refund benefits, despite the absence of foreign exchange inflow.
Until formal clarity is issued, a conservative approach, backed by proper documentation and proactive representations, remains the advisable course for taxpayers.
Author Bio
