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GST and Corporate Guarantee

NOVEMBER 17, 2023

By Vinod Yadav

AFTER much hue and cry over the taxability of Corporate Guarantee (CG) that was mostly triggered by the indiscriminate notices issued by various Govt agencies to various corporates, finally the government touched upon the subject by inserting Rule 28(2) in CGST Rules, 2017, clearing the cobwebs that it indeed is taxable.

"(2) Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person, by way of providing 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.".

Apparently, instead of dwelling on the taxability aspect, it goes a step further by defining the value of supply effective from 26th October, 2023, making taxability of the levy tacit.

Going by the wordings of the aforesaid sub-rule, it gets implied that the levy exists for the prior period also.

In view of above, unless the appropriate valuation method is adopted, the authorities may construe that the taxable value is the amount of corporate guarantee provided by the guarantor as if vindicating the notices sent to corporates earlier by various government agencies.

Nonetheless, there are a plethora of other issues also which are anticipated to be raised in future, especially in the cases where the CG is issued by the overseas holding company to the overseas bankers of the Indian subsidiary company:

- While the scope of service of CG appears a far cry without contractual agreement between the guarantor and the borrower, but even if it is treated as service, it looks unreasonable to consider the same as provided to the recipient in India.

- Treating such action as a 'Shareholder function' is another tangle which rules the levy out of the tax ambit.

- Thirdly, place of provision is another grey area in case, both the guarantor and the bank are located out of India.

- It seems 1% of the CG provided as taxable service sounds arbitrary and devoid of any accepted norms or method.

- Time of supply is way too ambiguous to adopt - whether date of issue of CG or when the CG is actually invoked or as and when the amount of loan is actually disbursed to the borrower.

- Adoption of valuation mechanism is another dicey problem when there is no consideration involved - whether to arrive at Open Market Value or to take 0.5% as in case of TP or the Residual Method as the last resort.

With all such ambiguous issues, there may be no guarantee of solace for Corporates to take a proper course of action on this 'service'.

As such, the government may incorporate some more clarifications via circulars which could reasonably guarantee (pun added) dispute-free levy and ITC.

[The author is Lead-GST, Calderys India Refractories Limited and the views expressed are strictly personal.]

(DISCLAIMER : The views expressed are strictly of the author and doesn't necessarily subscribe to the same. Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

Sub: corporate guaranree

as per the decision of supreme court in the matter of xilinx india technology services private limited reported in tiol 2023 ,1164, the foreign registered company is not a distinct or related person since the company has its own legal existance from shareholders.

hence rule 28 with sub rule 2 can be said to be applicable in that scene, i doubt

Posted by Navin Khandelwal