CA Rohit Surana & CA Sunayna Banthia
♦ Introduction:
In usual financial parlance, the guarantor provides a guarantee to a lender, in favor of a borrower. The guarantor is the giver of the guarantee, the lender is the receiver of the guarantee and the person for whom the guarantee is given is the beneficiary of the guarantee.
However, in GST parlance, it is important to understand that the language is from the viewpoint of “supply of services”. Hence, the guarantor is the supplier of the service, the borrower or beneficiary is the recipient of the service, and the lender is actually not a party to the supply, but has a relevance as the rules relate to who the guarantee is given. Hence, importantly, the receiver of the supply in GST parlance is not the lender, but the borrower.
Taxability and valuation of such corporate guarantee services have always been a debatable topic under GST. The prolonged debate around valuation of GST on corporate guarantee, extended with or without adequate consideration has been addressed, to a larger extent, with the insertion of sub-rule (2) to Rule 28 of the CGST Rules 2017, effective from 26th October, 2023 and issuance of two circulars by the CBIC viz. Circular No. 204/16/2023-GST dated 27th October 2023 & Circular No. 225/19/2024-GST, dated 11th July 2024. Sub-rule (2) of Rule 28 specifies a deemed value of consideration in case of supply of corporate guarantee services provided to a related person which shall be one per cent of the amount of such guarantee offered per annum, or the actual consideration, whichever is higher subject to certain conditions. Further, vide Notification no. 12/2024, dated 10th July, 2024, amendments have been made to the said sub-rule (2) of Rule 28 retrospectively, i.e., w.e.f. 26th October, 2023 which provides 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.
Before going into the taxability & valuation of corporate guarantee services provided under GST, let’s go through the relevant GST provisions in this regard.
♦ Relevant provisions under GST:
Schedule I of CGST Act: It provides for list of activities which shall be treated as supply even if made without consideration which inter alia includes–
“Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business.”
Further, Related persons are defined u/s 2(84) of the GST Act. Persons shall be deemed to be related if they fall under any of the categories below:
- Officer or director of one business is the officer/ director of another business
- Businesses legally recognized as partners
- An employer and an employee
- Any person who holds at least 25% of shares in another company, either directly or indirectly
- One of them controls the other directly or indirectly
- They are under common control or management
- The entities together control another entity
- The promoters or managerial persons are members of the same family
Persons include a legal person who can be individuals, HUF, company, firm, LLP, co-operative society, a body of individuals, local authority, government, or an artificial juridical person. It also includes entities incorporated outside India. Persons who are associated with one another’s business or is a sole agent or sole distributor or sole concessionaire shall be deemed to be related.
From the afore-mentioned provisions, it can be inferred that supply made between related persons for inadequate or no consideration is covered under Schedule I of the GST Act (i.e. such services shall be deemed supply in terms of Schedule-I), provided such supply takes place in the course or furtherance of business.
♦ Valuation of transactions between related persons: Value of Supply between related persons is determined as per sub rule (1) of Rule 28, of CGST Rules 2017. In terms of this sub rule, the value of supply between related persons shall be determined as below:
a. Open market value of such supply;
b. If, open market value is not available, value of supply of like kind and quality;
c. If, value cannot be determined as per clause (a) or (b) above, value to be determined by applying Rule 30 or Rule 31 in order.
Further, proviso to sub rule (1) of Rule 28 is read as follow: “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.”
It is pertinent to note herein that Sub-rule (2) was inserted under Rule 28 w.e.f. 26-10-2023 to explicitly provide for a deemed value of consideration in case of supply of corporate guarantee which reads as below:
“Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person, 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 per annum, or the actual consideration, whichever is higher.”
Further, proviso has been inserted to sub rule (2) vide Notification no. 12/2024, dated 10th July 2024 retrospectively w.e.f. 26-10-2023 which is read as:
“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.”
Thus, as per the aforesaid proviso, the benefit of declaring any value in the invoice for transaction between related person as per Rule 28(1), when recipient is eligible for full ITC, has been made available in case of corporate guarantee service also. Thus, the value declared in the invoice by the guarantor (supplier of service) shall be deemed to be value of supply.
However, the said proviso is applicable only where the following conditions are met:
- Recipient of the service (i.e., the borrower) is a related person of the supplier (i.e., the guarantor),
- Recipient of the service is located in India (since GST is not levied on export of services), and
- Recipient of the service is eligible for full ITC.
♦ GST Rate for Corporate Guarantee: The GST rate on corporate guarantee provided in favor of parent companies, subsidiaries, and related parties is 18%. This rate is applied to either 1% of the guaranteed amount or the actual consideration, with the higher of the two determining the tax liability.
♦ Taxability of Personal and Corporate Guarantee: Circular No. 204/16/2023-GST dated 27th October 2023, clarified issues pertaining to taxability of personal guarantee and corporate guarantee in GST. As per the Circular, personal guarantee which is provided by the promoters, directors, other managerial personnel, and shareholders of a company (referred to as guarantor) to the bank/ financial institutions (referred to as lender) for sanctioning of credit facilities to the said company (referred to as borrower) without any consideration, the value of supply for such services by way of providing personal guarantee shall be determined in terms of Rule 28 (1) , i.e. value shall be taken to be the Open Market Value . Further, the open market value for such supply may be treated as zero (as per RBI Guideline vide Circular No. RBI/2021-22/121 dated 9th November, 2021) and therefore, taxable value of such supply may be treated as zero.
Circular No. 204/16/2023-GST, further provides that corporate guarantee provided by the holding company or any other group company (guarantor) for sanction of credit facilities to its subsidiary/other group company (borrower), to the bank/ financial institutions (lender), even when made without any consideration, the value of supply for such supply of services by way of providing corporate guarantee shall be determined in terms of Rule 28(2) as discussed above , thus taxable value of supply shall be deemed to be one per cent of the amount of such guarantee offered per annum, or the actual consideration, whichever is higher. However, it is crucial to note herein that as per the newly inserted proviso to Rule 28(2), value declared in the invoice shall be deemed to be the value of said supply of services, when the recipient is eligible for full ITC.
It is noteworthy herein that Circular 204/16/2023-GST, dated 27-10-2023 clearly specified that “the taxable value of such supply of services (corporate guarantee), will henceforth be determined as per the provisions of the sub-rule (2) of Rule 28 of CGST Rules (1% of guarantee amount), irrespective of whether full ITC is available to the recipient of services or not.” Hence, this benefit of charging any amount as value of service was not available as per the existing provisions.
However, with insertion of proviso to Rule 28(2), benefit of charging any value of supply has been extended to corporate guarantee services also. Hence, w.e.f. 26-10-2023 the value declared by the supplier in the invoice shall be deemed to be the value of supply of such corporate guarantee services. Further, for cases prior to 26-10-2023, valuation shall be as per Rule 28(1) i.e. open market value as already discussed above.
♦ Frequently Asked Questions
Following FAQs have been prepared based on the clarification provided by the CBIC vide Circular No. 204/16/2023-GST dated 27th October 2023& Circular No. 225/19/2024-GST dated 11th July 2024.
1) Valuation Rules [Rule 28(2)] has been introduced w.e.f. 26.10.2023. Thus, question arises as to GST applicability in case of Guarantees Issued Prior to 26th October 2023?
Clarification: – It was clarified vide Circular No. 225/19/2024-GST, that GST was applicable to corporate guarantees even before the insertion of sub-rule (2) on 26thOctober 2023. Rule 28(2) of CGST Rules is only for determination of the value of the taxable supply and not regarding the taxability of the said supply itself. Valuation before 26th October 2023 to be done as per sub rule (1) of Rule 28.
However, if the corporate guarantee is issued or renewed on or after 26th October 2023 i.e. post 26th October 2023, valuation to be done as per Rule 28(2).
2) What will be the Value of Supply of Corporate Guarantee, in cases where the corporate guarantee is provided for a particular amount, whereas the loan is only partly availed or not availed at all by the recipient?
Clarification: – Supply of the service of providing a corporate guarantee is not linked with the actual disbursal of the loan. Thus, valuation of corporate guarantee to be based on the amount guaranteed and not on the actual loan disbursed.
3) Whether the recipient would be eligible to avail full ITC (Input Tax Credit) even before total loan is disbursed?
Clarification: – It was clarified that the ITC eligibility for the recipient is independent of the actual loan disbursed. Thus, the recipient of the service of providing corporate guarantee shall be eligible to avail the ITC, irrespective of when the loan is actually disbursed to the recipient, and irrespective of the amount of loan actually disbursed.
4) Whether GST would be applicable again, in the case of takeover of existing loans?
Clarification: – 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 is no GST impact on the takeover of loans unless a fresh corporate guarantee is issued or renewed. However, if the takeover of the loan is followed/ accompanied by issuance of fresh corporate guarantee, then the same would attract GST.
5) What is the amount on which GST is payable, where corporate guarantee is provided by more than one entity / each co-guarantor?
Clarification: – 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. However, where the sum of the actual consideration is less than one per cent of the amount of such guarantee offered, GST payable by each co-guarantor proportionately on 1% of the amount guaranteed by them.
For instance, if there are two co-guarantors, A and B, who jointly provide a corporate guarantee to a banking/ financial institution on behalf a related recipient C for Rs. 1 crore, then A and B shall each pay GST on 0.5% of the amount guaranteed.
However, if in the instant case, A and B provide corporate guarantee jointly to a banking/ financial institution on behalf a related recipient C for Rs 1 crore, ‘A’ provides guarantee for 60% of the guarantee amount and ‘B’ provides guarantee for the remaining 40% of the guaranteed amount, then GST shall be payable by A and B proportionately i.e., 0.6% and 0.4% of the amount guaranteed. This is to say that A shall pay GST on 1% of the amount guaranteed by A, i.e., 1% on Rs. 60 lakhs and B shall pay GST on 1% of the amount guaranteed by B, i.e., 1% on Rs. 40 lakhs.
6) What will be the taxability under GST, in case of Intra -group Corporate Guarantees? Or
Will tax be payable by recipient under RCM, if a group company does not issue invoice charging GST on corporate guarantee?
Clarification: – It was clarified vide Circular No. 225/19/2024-GST, that in cases where-domestic Corporates issues intra-group guarantees, GST is to be paid under forward charge mechanism, and invoice is to be issued by the supplier of the service of providing corporate guarantee to the related recipient under Section 31 of CGST Act, 2017 read along with the relevant rules. Thus, RCM shall not be applicable for Corporate Guarantees provided by Intra -group (domestic) parties.
7) What will be the taxability under GST where such guarantee is provided by the foreign/overseas entity for a related entity located in India?
Clarification: – 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.
8) What shall be the frequency of tax payment for discharging tax liability on corporate guarantee?
Clarification: – Rule 28(2) of CGST Rules has been amended retrospectively with effect from 26th October 2023, vide notification No.12/2024 -CT dated 10.07.2024, therefore GST payable on 1% of the amount guaranteed per annum or actual consideration, whichever is higher.
Accordingly, the value of supply of the service of providing corporate guarantee service 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
For instance, where the corporate guarantee is provided for a period less than a year, say 6 months (half a year), valuation may be done on Proportionate basis for the said period i.e., in this case, the value of the said supply of services may be taken as half of one per cent of the amount of such guarantee offered (6/12 * one per cent), or the actual consideration, whichever is higher. Further, 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 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.
9) What will be the value of supply of such services of providing corporate guarantee, in cases where full input tax credit is available to the recipient of services?
Clarification: – As discussed above, proviso has been inserted in sub-rule (2) of Rule 28 of CGST Rules, retrospectively with effect from 26th October 2023 vide notification No.12/2024 -CT dated 10-07-2024 to provide the benefit in cases involving supply of service of corporate guarantees provided between related persons.
Accordingly, it was clarified that 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.
10) Whether the valuation in terms of Rule 28(2) of CGST Rules will apply to the export of the service of providing corporate guarantee between related persons?
Clarification: – As per the amendment done in sub-rule (2) of rule 28 of CGST Rules retrospectively w.e.f. 26th October 2023 vide notification No. 12/2024 -CT dated 10.07.2024, Rule 28(2) will not apply to exports where the recipient of services is located outside India. Similar amendment done in sub-rule (2) of rule 28 of CGST Rules retrospectively w.e.f.26thOctober 2023 vide notification No. 12/2024 -CT dated 10.07.2024.
11) Whether the activity of providing personal guarantee by the Director/promotors etc. of a company to the bank/ financial institutions for sanctioning of credit facilities to the said company without any consideration will be treated as a supply of service or not and whether the same will attract GST or not?
Clarification: – The director and the company are to be treated as related persons. As per Schedule I of CGST Act, supply of goods or services or both between related persons, when made in the course or furtherance of business, shall be treated as supply even if made without consideration.
Accordingly, the activity of providing personal guarantee by the Director to the banks/ financial institutions for securing credit facilities for their companies is to be treated as a supply of service, even when made without consideration.
However, it has been clarified by the circular no. 204/16/2023-GST dated 27th October 2023 that since the RBI mandates vide Circular No. RBI/2021-22/121 dated 9th November, 2021 that no consideration, including commission or fees, can be paid to directors for providing personal guarantees, the open market value is effectively zero. Therefore, no GST is payable on such supplies when no consideration can be paid.
In exceptional cases where directors or guarantors are paid remuneration (For Example- the director, who had provided the guarantee, is no longer connected with the management but continuance of his guarantee is considered essential because the new management’s guarantee is either not available or is found inadequate), the taxable value of the supply of service is the remuneration or consideration provided by the company, directly or indirectly.
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