GST on Corporate Guarantee
MARCH 03 , 2025
By Vinod Bhagwati Yadav
GST on Corporate Guarantee service has been confirmed, though implicitly, via introduction of Rule 28(2) in the CGST Rules to make the same with effect from 26th October 2023 [Notification 52/2023-CT refers]. However, this leaves much to be desired, especially in cases where such transactions have taken place prior to the effective date of its implementation, for those taxpayers who are not eligible to avail full ITC.
For recipients, who would not be able to avail the benefit of 2nd Proviso to the Rule 28(1), the challenge appears to be unsurmountable as the old litigation related to these transactions under GST regime, which actually triggered the issue of Rule 28(2), would continue to be alive and create revenue implications for them. This is because there was no mode of determining of taxable value prior to this date 26th October 2023, because Rule 28(1) would not help to arrive at the same, when no consideration is involved (where two more parties are involved between the supplier and the recipient i.e. the bankers of both the parties) and if at all the valuation rule covers it, the matter would trickle down to Rule 31, which would make the levy much higher than 1% of the value of Corporate Guarantee provided.
It seems that the objective of the government was not to tax such supplies for the prior period. However, the issue of subsequent Circular 225/2024 dated July 11, 2024, made things complicated as this circular has specifically stated that such transactions were taxable since the onset of the GST regime.
The Circular is extracted as below:
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S No
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Issue
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Clarification
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1
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Whether sub-rule (2) of rule 28 of CGST Rules will apply to the corporate guarantees issued prior to insertion of the said sub-rule on 26th October 2023? Also, where intra-group corporate guarantees have been issued before 26th October 2023, which are still in force today, would they be liable to pay GST on
"1% of the amount of such guarantee offered" on such guarantees?
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It is to be clarified that the supply of service of providing corporate guarantee to any banking company or financial institution by a supplier to a related recipient, on behalf of the said recipient, was taxable even before the insertion of sub-rule (2) in rule 28 of CGST Rules with effect from 26th October 2023. Rule 28(2) of CGST Rules is only for determination of the value of the taxable supply of providing corporate guarantee to any banking company or financial institution by a supplier to a related recipient, on behalf of the said recipient and not regarding the taxability of the said supply itself. Prior to the insertion of the said sub-rule, i.e., before 26th October 2023, the valuation of service of providing corporate guarantee to any banking company or financial institution by a supplier to a related recipient, on behalf of the said recipient, was to be done as per the provisions of Rule 28 of CGST Rules, as it existed then. Therefore, in respect of supply of services of providing corporate guarantee between related persons, in respect of corporate guarantee issued or renewed before 26th October 2023, the valuation of the said supply is to be done in accordance with Rule 28, as it existed during that time. However, if the corporate guarantee is issued or renewed on or after 26th October 2023, then the valuation of the said supply will be required to be done as per Rule 28(2) of CGST Rules.
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However, when the service itself was treated as taxable since the inception of GST, then there was no necessity for the issue of specific sub-rule 28(2) for the valuation of such service. The earlier sub-rule 28(1) would cover it and only the valuation mechanism could have been inserted therein. It is illogical to have two different sets of provisions for the same service.
And if we believe, purely for the sake of argument, that the given sub-rule was enacted to bring lucidity on the valuation of such transactions, then why was the same made effective prospectively. It could have been simply made ex post facto, if at all the intention was to tax the same for the past periods. There is a plethora of provisions which have been so hastily made effective retrospectively without giving an iota of consideration to the substantial inconvenience and challenges the taxpayers would be put into.
It proves that the levy was meant to be from the effective date only, and not for the periods gone by.
The purpose was never to make such service taxable for the prior period. Had it been so, there would have been specific mention of the prior period in the Notification which was particularly issued just for a single service only. At least, there could have been some reference to the valuation for prior period. Silence appears to be eerie.
Logically, it would be absurd to levy 1% of CG prospectively and a disproportionately higher levy for the earlier period which, even otherwise, would become recoverable with interest, if such transactions are treated as taxable for the earlier 6 years! This does not align with the principles of equality enshrined in the Constitution of India.
The matter looks to be highly litigious and only time will tell how sensible this amendment was.
(The views expressed are strictly personal.)
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