Clarification on Taxability and Valuation of Corporate Guarantees.!

The Ministry of Finance, Department of Revenue, and Central Board of Indirect Taxes and Customs (CBIC) have issued Circular No. 225/19/2024-GST to clarify various issues related to the taxability and valuation of services providing Corporate Guarantees between related persons.

Understanding Corporate Guarantees

A corporate guarantee is a company’s promise to cover another company’s debt if it defaults, ensuring lender security.

Key Clarifications: 1. Applicability of Sub-Rule (2) of Rule 28:

• Sub-rule (2) of Rule 28 of the CGST Rules, 2017, was inserted via Notification No. 52/2023-Central Tax on October 26, 2023. It was subsequently amended retroactively from October 26, 2023, through Notification No. 12/2024 on July 10, 2024. This sub-rule addresses the valuation of services providing to banking companies or financial institutions.
• Corporate guarantees issued or renewed before October 26, 2023, are to be valued according to Rule 28 as it existed before this date. Guarantees issued or renewed on or after this date will follow the amended Rule 28(2).

2. Valuation of Corporate Guarantees and ITC Eligibility:

• The service’s valuation for providing a corporate guarantee is based on the guaranteed amount, not the loan disbursed.
• The recipient of the corporate guarantee service can avail of Input Tax Credit (ITC) irrespective of the actual loan disbursement.

3. GST Applicability in Loan Takeovers:

• GST implications arise only if a new corporate guarantee is issued or the existing one is renewed when another banking company or financial institution takes over existing loans.

4. Corporate Guarantees by Multiple Entities:

• When multiple related entities provide a corporate guarantee, GST is payable by each co-guarantor based on their proportionate share of the guarantee amount.

5. Domestic vs. Foreign Corporate Guarantees:

• Domestic corporate guarantees are subject to GST under the forward charge mechanism. Foreign corporate guarantees provided to a related entity in India fall under the reverse charge mechanism.

6. Frequency of GST Payments:

• Calculate GST on corporate guarantees annually based on one percent of the amount guaranteed or the actual consideration, whichever is higher. Calculate GST proportionately if the guarantee period is less than a year.

7. Valuation Declaration in Invoices:

• If the recipient of the service can claim full input tax credit, deem the value declared in the invoice as the open market value.

8. Export of Corporate Guarantee Services:

• The provisions of Rule 28(2) do not apply to the export of services of providing corporate guarantees between related persons when the recipient is located outside India.

Conclusion:

The Circular ensures uniform implementation of GST provisions related to corporate guarantees across various field formations.

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