The introduction of corporate guarantee under the GST has been a controversial issue since the inception of the GST regime. The term “Corporate Guarantee” is not defined in the GST Act. In essence, a corporate guarantee implies that one entity guarantees the performance of another entity’s contract or releases it from liability in the event of default. A Corporate Guarantee is like a safeguard.
Typically, corporate guarantees are given by the holding company or parent company on behalf of its subsidiaries to secure loans from financial institutions, often without any consideration.
Corporate Guarantee were considered as non-taxable as there was no consideration. Interestingly, Schedule I of the CGST Act, 2017 provides that transactions will be treated as supplies even if there is no consideration.
The CGST Act, 2017 classifies holding companies and subsidiaries as “related persons” This classification therefore creates a level of complexity in the GST treatment of corporate guarantees, as transactions between related parties, even if not considered, are still deemed taxable goods under the Schedule I of the CGST Act, 2017 – the supply of goods or services between related parties in the course or furtherance of trade is deemed to be a supply even if such supply is made without any consideration.
For the purpose of valuation of supply between related persons, Rule 28 of the CGST Rules, 2017 stipulates that various methods of valuation, such as open market value, value of supplies of similar nature and quality, etc. are applicable in case of supply between related persons. Further, in case a person related to the recipient is entitled to “full ITC”, the second clause of Rule 28 allows declaration of any value on the invoice to be treated as value of goods or services.
A recent amendment to the CGST Rules, 2017, based on the recommendations of the 52nd meeting of the GST Council, has been introduced in the form of Rule 28(2). This sub-rule provides that the value of providing services to a related person, through the provision of a corporate guarantee to a banking company or financial institution on behalf of that related person, shall be deemed to be the higher of the following:
(a) 1% of the amount of this guarantee given, or
(b) the actual amount of consideration
Notably, this new regulation will have an overriding impact on the current valuation methodology prescribed for transactions between related parties under Rule 28. Therefore, to value corporate guarantees industry, the amount specified above shall apply regardless of its value in the open market, the value of supplies of the same kind, quality, invoice value, etc. In this regard, the CBIC has clarified that the valuation of such supply shall be made only under the newly inserted Rule 28(2) and the calculation of value of such supply shall be independent of whether the entire ITC of GST paid to the supplier is provided to the recipient of the service.
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