The Central Board of Indirect Taxes & Customs (CBIC) is all set to come out with detailed clarification regarding the applicability of GST on corporate guarantees by related parties for loans from banks or financial institutions. The circular is expected to give a method for the distribution of GST liability in cases where there is more than one guarantor and the responsibility of paying tax in cases where there is a foreign guarantor, among many others.
All these are part of the new draft circular, recommended by the GST Council in its meeting on Saturday. It recommended an amendment of Rule 28(2) of the CGST Rules (related to the valuation of the supply of services of corporate guarantee provided between related parties) retrospectively with effect from October 26, 2023. It intends to clarify various issues regarding valuation. It has been recommended that valuation under Rule 28(2) of the CGST Rules would not be applicable in the case of the export of such services and also where the recipient is eligible for full input tax credit.
GST Liability
The officials say that the draft clarificatory circular will also prescribe a formula for the distribution of GST liability in the case of multiple related entities. “The value of services of providing corporate guarantee will be the sum of the actual consideration paid/payable to co-guarantors if the said amount of total consideration is higher than 1 per cent of the amount of such guarantee,” an official explained. However, if it is less than 1 per cent, then GST will be payable by each co-guarantor proportionately on one per cent of the amount generated by them.
Another key clarification would be the issuance of invoices in cases where domestic corporate issues inter-corporate guarantees. Here, GST is to be paid on the basis of a forward charge mechanism, and the supplier will pay that and claim ITC. However, the guarantee is provided by a foreign or overseas entity, hence GST is to be paid on reverse charge mechanism, i.e., the domestic recipient has to pay GST.
Saurabh Agarwal, Tax Partner with EY, says CBIC’s prescribing the deemed value of such supplies as the higher of 1 per cent of the guaranteed amount or the actual consideration charged was aimed to standardize valuation and streamline GST compliance. However, a lingering question remained with respect to valuation of corporate guarantee provided between the related person.
“In line with industry recommendations, the Council has clarified that the valuation rule specified under Rule 28(2) would not be applicable in the case of the export of such services and where the recipient is eligible for full input tax credit. This welcome development from the Council significantly enhances tax certainty for businesses navigating the complexities of corporate guarantees under GST,” he said.
Gunjan Prabhakaran, Partner with BDO India, said that the retrospective amendment effectively restored the status quo. “This amendment would help in easing the compliance and record-keeping burden and would also reduce fund blockages in some cases. However, the amendment would continue to apply in cases where full input tax credit is not available to the recipient and sectors such as power or real estate would look for a reduced rate of deemed valuation,” she said.
On October 7, last year, the GST Council recommended an 18 per cent tax on the parent company’s guarantee to the subsidiary. However, the director’s personal guarantee was excluded. Later, it was notified, and a circular was issued. While the first part of the circular is related to the personal guarantee given by the director, its second part deals with the parent company’s corporate guarantee to its subsidiary for a bank loan. The second part of the circular was challenged in the Punjab & Haryana High Court and has been stayed.