Summary: A corporate guarantee provided by a foreign parent company to support bank borrowings of its Indian subsidiary may attract Goods and Services Tax (GST) even when the parent does not charge any guarantee fee. Under Schedule I of the CGST Act, 2017, specified transactions between related persons, including imports of services in the course or furtherance of business, are treated as supplies without consideration. Where the guarantor is located outside India, the Indian subsidiary is generally responsible for paying Integrated GST under the reverse charge mechanism. The valuation of corporate guarantee services between related persons is governed by Rule 28(2) of the CGST Rules and Circular No. 225/19/2024-GST. The prescribed valuation ordinarily considers one per cent of the amount guaranteed per annum or the actual consideration, whichever is higher, subject to the special valuation provision applicable where the recipient is eligible for full input tax credit. The Indian subsidiary must examine the guarantee amount, duration, date of issuance or renewal, applicable valuation, self-invoicing requirements and tax payment obligations. Input tax credit of the IGST paid may generally be available where the borrowing supports eligible business activities, subject to statutory restrictions and proportionate reversal where exempt supplies are involved. Companies should maintain a complete register of guarantees, supporting documents, tax computations, invoices and credit records. Guarantee fees paid to foreign parents may also require independent examination of withholding tax and transfer pricing provisions. Reviewing existing arrangements and past tax positions can help identify potential interest liabilities, avoid compliance disputes and strengthen documentation during GST audits.
GST on Corporate Guarantees from a Foreign Parent: Valuation, Reverse Charge and Input Tax Credit
A foreign parent often guarantees the bank loans of its Indian subsidiary, and charges nothing for it. Under GST that arrangement is still treated as a supply of services, and it has a value, a tax liability and, in most cases, a credit.
Why a free guarantee is taxable
Schedule I of the CGST Act, 2017 treats certain supplies as taxable even when no consideration is paid. Two entries matter here. One covers supplies between related persons made in the course or furtherance of business. The other covers import of services by a taxable person from a related person or from another establishment outside India. A parent and its Indian subsidiary are related persons, so a guarantee from the parent falls within both.
Who pays the tax
When the guarantor is outside India, the service is an import. The Indian subsidiary, as recipient, pays IGST under the reverse charge mechanism and reports it in its returns. There is no invoice from the foreign parent to rely on, so the company should raise a self-invoice for the purpose.
How the value is fixed
Rule 28(2) of the CGST Rules was amended in October 2023 to deal with guarantees between related persons. The value is one per cent of the amount of the guarantee offered, or the actual consideration charged, whichever is higher. The Department’s Circular No. 225/19/2024-GST (July 2024) clarifies the application of this rule, including the position on credit.
Input tax credit
If the guarantee is used in the course or furtherance of business and the subsidiary is entitled to full credit, the IGST paid under reverse charge can generally be taken as credit. The condition to check is whether the guarantee relates to borrowings used for business purposes and whether any credit is blocked. Where the subsidiary makes exempt supplies, credit will be restricted in proportion.
A practical routine
List every guarantee, comfort letter and similar support the parent has given, with the amount and the dates it applies.
For each one, compute the value under Rule 28(2) and the IGST on it.
Raise a self-invoice, pay tax under reverse charge in the month the liability arises, and keep the working.
Claim credit if eligible, and record why.
Review the position each year because the guarantee amount and the period may change.
Points to watch
Charging a guarantee fee changes the value if the fee is higher than the one per cent figure.
A guarantee fee paid to a foreign parent is also a payment to a non-resident, so withholding tax and transfer pricing questions follow. These are separate from GST and need their own analysis.
Some entities have been in dispute with the department on past years. If your company has not paid GST on past guarantees, consider whether to regularise the position with interest.
In short, a free guarantee from the parent has a GST cost for the subsidiary, and it is cheaper to compute and pay it on time than to explain it in an audit.
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Author bio : N. Sudheer, M.Com., FCS, LL.B., is a Partner at A2 Consultants, Hyderabad.
