Corporate Guarantees to Foreign Related Parties Without Consideration: Can it still qualify as Export of Services Under GST?
1. Background:
Indian multinational groups often extend corporate guarantees on behalf of their foreign subsidiaries or related parties to facilitate borrowings from overseas banks or financial institutions. A common issue arising in such cases is whether the issuance of a corporate guarantee without any consideration would qualify as an “export of service” under the Indian GST framework, and whether the benefits of zero-rated supply can be claimed in such a scenario.
This article delves into this nuanced question, particularly in light of the deeming provisions of Schedule I of the CGST Act, 2017, read with the FEMA (Guarantees) Regulations, 2000, and relevant RBI Master Directions.
2. Nature of Transaction: Supply Without Consideration
Under Section 7 of the CGST Act, 2017, the term “supply” typically requires consideration. However, Schedule I carves out an exception by deeming certain activities as “supply” even without consideration, if carried out between related persons in the course or furtherance of business.
In the present case, the Indian company (the “Guarantor”) has issued corporate guarantees on behalf of its foreign related parties without charging any guarantee commission or fee. Though no consideration is involved, the transaction qualifies as a supply under Schedule I, since it is between related parties.
3. Valuation and Tax Compliance
Under Rule 28(1) read with Section 15 of the CGST Act, in cases involving related parties, the open market value (OMV) is adopted for GST valuation. Accordingly, the Indian company may determine OMV based on comparable guarantees issued in arm’s length scenarios.
In line with Section 31, a tax invoice can be issued, and GST can be discharged either under IGST with payment or under LUT (Letter of Undertaking) claiming the benefit of zero-rated supply.
4. Export of Services: Applicability of Section 2(6) of the IGST Act
To qualify as an export of service, all five conditions under Section 2(6) of the IGST Act, 2017 must be met:
1.Supplier of service is in India
2. Recipient of service is outside India
3. Place of supply is outside India
4. Payment received in foreign exchange or INR as permitted by RBI
5. Supplier and recipient are not merely establishments of a distinct person
While four of the five conditions are satisfied in the corporate guarantee case, the fourth condition—receipt of payment—is not fulfilled.
5. Can the Absence of Consideration Deny Export Status?
Herein lies the interpretational conflict.
- Schedule I of the CGST Act deems the transaction as a supply despite absence of consideration.
- Section 2(6) of the IGST Act prescribes receipt of payment as a condition for treating the supply as an export of service.
The question is whether the lack of foreign exchange realization—stemming solely from Schedule I, which does not mandate consideration for issuing such guarantees—should prevent the transaction from qualifying as an export.
6. Harmonizing Schedule I and Section 2(6): A Legal Perspective
It is well settled that in cases of conflict, a specific provision overrides the general. Schedule I, being a specific deeming provision for supply without consideration, cannot be negated by the general condition of foreign exchange realization under Section 2(6), especially where such realization is not mandated by RBI.
7. Rule 96A of CGST Rules: RBI Permission and Receipt Clause
FEMA (Guarantees) Regulations, 2000, and RBI Master Directions do not require Indian companies to receive any commission or consideration for issuing corporate guarantees to foreign subsidiaries or related parties. In fact, such guarantees are often issued as part of group financial support mechanisms.
Further, Rule 96A(1)(b) of the CGST Rules, 2017, states that a service can be treated as exported under LUT even where payment is not received in foreign exchange or INR, where RBI permits such non-receipt.
Given that RBI expressly permits corporate guarantees to be issued without receipt of consideration, this regulatory permission suffices to fulfill the requirement under Rule 96A. Therefore, the benefit of zero-rated supply under LUT should not be denied to such transactions.
8. Conclusion: A Balanced Interpretation in Favour of the Taxpayer
On a combined reading of:
- Schedule I of the CGST Act (deeming supply without consideration),
- Section 2(6) of the IGST Act (export of service definition),
- Rule 96A of CGST Rules (non-receipt permitted by RBI), and
- FEMA/RBI Guidelines (non-mandatory nature of consideration),
…it is reasonable to conclude that a corporate guarantee issued without consideration by an Indian company to a foreign related party can still qualify as an export of service.
Accordingly, the Indian company may issue an invoice under LUT and treat the transaction as zero-rated, without insisting on foreign exchange realization, provided where RBI regulations permit such non-receipt. This interpretation ensures that GST is not levied where Corporate Guarantees has been provided to Foreign Related Parties Without Consideration.
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