Goods & Services Tax (GST) on corporate-guarantee from overseas group entity payable only one-time, not periodically, Rajasthan’s Authority for Advance Ruling (RAAR) has held. Experts say though the ruling is in line with the Circular, it poses the challenge of paying the full tax upfront for the entire duration of the guarantee.
“GST under reverse charge mechanism (RCM) is required to be paid at one time and not periodically for guarantee has been issued only once and is valid for a specified period of time without requirement of any periodical renewal (until the final settlement date of loan contract with Bank/Financial Institution),” RAAR said in a recent ruling.
In this respect, AAR found section 13(3) of GST rules as essential to identify the time of supply. Further it elucidated that where no consideration is charged for CG by the service supplier (overseas related party in this case), the time of supply will be date of entry in the books of account of the service recipient i.e. Indian subsidiary and the GST liability is to be paid at one time basis at the time of supply under RCM. In this vein, it clarified that the question of paying GST periodically will not arise as GST is required to be paid at one time for import of service; Also, expounds on the value of supply.
According to Harpreet Singh, Partner (Indirect Taxes) with Deloitte, this advance ruling is in line with the Circular issued earlier where GST needs to be paid only once at the time of issuance of corporate guarantee. But “the challenge for the industry would be to pay full tax upfront for the entire duration of guarantee, that is, if the corporate guarantee is for five years, adopting the valuation rule, tax would need to be paid at 5 per cent, that is, one per cent for each year. This would become more challenging if the guarantee is withdrawn during the tenure of five years, post upfront payment of tax,” he said.
As recommended by the GST Council on October 7, 2023, the parent company’s corporate guarantee to its subsidiary for a bank loan will attract 18 per cent GST. Later, CBIC said in a notification, dated October 27, 2023, that the value of supply of services by a supplier to a recipient who is a related person, by way of providing a 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, or the actual consideration, whichever is higher.
This means if the corporate guarantee were ₹100 crore, then ₹18 lakh would be the GST liability. Change will be prospective and it shall have no bearing on transactions executed prior to October 26, 2023, consequently preserving the tax risk associated with past transactions.
Post GST Council meeting last October, it was said that when no consideration is paid by the company to the director in any form, directly or indirectly, for providing a personal guarantee to the bank/ financial institutions on their behalf, the open market value of the said transaction/ supply may be treated as zero. This means there will be no GST if a director provides a personal guarantee for a loan from a bank or any financial institution to their own company.