The Goods and Services Tax (GST) in India is a comprehensive tax levied on the supply of goods and services. It has streamlined indirect taxation, replacing many central and state taxes. Recently, the government has issued Circular No. 225/2024 to clarify the taxability and valuation of corporate guarantees provided between related persons. This article aims to break down the circular’s contents into simple, understandable terms.
Corporate guarantees are assurances provided by one entity to a financial institution on behalf of a related entity, ensuring the repayment of a loan or financial obligation. These guarantees play a crucial role in securing loans and financial assistance. Understanding the GST implications on such guarantees is essential for businesses to ensure compliance and avoid any potential disputes.
Key Clarifications in the Circular
- Retroactive Application of Rule 28(2):
- The circular clarifies that the supply of corporate guarantees was taxable even before the specific sub-rule (2) was introduced in Rule 28 of the CGST Rules on October 26, 2023.
- For guarantees issued or renewed before this date, valuation follows the earlier provisions of Rule 28. Post-October 26, 2023, the valuation is explicitly defined as 1% of the guaranteed amount or the actual consideration, whichever is higher.
- Valuation of Corporate Guarantees:
- The value of a corporate guarantee is based on the total guaranteed amount, not on the actual loan disbursed.
- Recipients of such services can avail of Input Tax Credit (ITC) regardless of when the loan is disbursed or its amount.
- Impact of Loan Takeovers:
- If a loan guaranteed by one entity is taken over by another financial institution, GST is not applicable unless a new corporate guarantee is issued or the existing one is renewed.
- Co-Guarantors’ Tax Liability:
- When multiple entities provide a corporate guarantee, each co-guarantor must pay GST based on their respective share of the guarantee amount.
- Domestic and Foreign Guarantees:
- For intra-group guarantees within India, GST is paid under the forward charge mechanism by the service provider.
- For guarantees provided by foreign entities for Indian companies, GST is payable under the reverse charge mechanism by the recipient in India.
- Payment Frequency:
- GST on corporate guarantees is calculated annually based on 1% of the guaranteed amount or the actual consideration, whichever is higher.
- For guarantees issued for less than a year, the value is proportionate to the duration.
- Invoice Value Deemed as Open Market Value:
- If full ITC is available, the value declared in the invoice is considered the open market value for GST purposes.
- Export of Corporate Guarantee Services:
- The amended sub-rule (2) does not apply to the export of corporate guarantee services. Thus, guarantees provided to entities outside India are exempt from these specific valuation rules.
FAQs
Q1: What is the significance of the new sub-rule (2) in Rule 28 of the CGST Rules?
A1: The new sub-rule (2) provides a specific method for valuing the supply of corporate guarantees, ensuring consistency and clarity in GST compliance.
Q2: How is GST calculated for corporate guarantees provided before October 26, 2023? A2: For guarantees issued or renewed before this date, the valuation follows the provisions of Rule 28 as they existed before the introduction of sub-rule (2).
Q3: Can a recipient of a corporate guarantee avail of ITC before the loan is disbursed?
A3: Yes, recipients can avail of ITC subject to other conditions specified in the CGST Act and Rules, irrespective of the loan disbursement status.
Q4: Is GST applicable on the takeover of a loan guaranteed by a corporate entity?
A4: No, GST is not applicable on the loan takeover itself unless a new or renewed corporate guarantee is issued.
Q5: How do co-guarantors share the GST liability?
A5: Co-guarantors share the GST liability proportionately based on their respective guarantees. For example, if two guarantors cover 60% and 40% of the guarantee amount, they will pay GST on these respective amounts.
Q6: What is the payment frequency for GST on corporate guarantees?
A6: GST is calculated annually or proportionately for periods less than a year, based on 1% of the guaranteed amount or the actual consideration, whichever is higher.
Q7: How is the invoice value treated for GST purposes when full ITC is available?
A7: When full ITC is available, the invoice value is deemed the open market value for GST purposes, simplifying compliance.
Q8: Are corporate guarantees provided to foreign entities subject to the same valuation rules?
A8: No, the valuation rules under sub-rule (2) do not apply to the export of corporate guarantee services, exempting guarantees provided to foreign entities from these specific rules.
This circular aims to bring clarity and uniformity in the tax treatment of corporate guarantees, helping businesses navigate GST compliance more effectively, Download the full circular no. 225/19/2024 GST
