GST Update – GST Applicability on Corporate Guarantee
Pursuant to the decision taken in the 52nd GST Council meeting, the following amendment notification and clarifications have been issued by the CBIC with regard to the personal guarantee given by the directors and corporate guarantee given by the body corporates:
- Amendment to Rule 28:
(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.
- Following clarifications have been issued by Circular No. 204/16/2023-GST dated 27th October 2023:
- Issue: Whether the activity of providing personal guarantee by the Director of a company to the bank/ financial institutions for sanctioning of credit facilities to the said company without any consideration will be treated as a supply of service or not and whether the same will attract GST or not.
Clarification: Due to the RBI mandate, the open market value of the said transaction/ supply may be treated as zero and therefore, taxable value of such supply may be treated as zero. In such a scenario, no tax is payable on such supply of service by the director to the company.
- Issue: Whether the activity of providing corporate guarantee by a person on behalf of another related person, or by the holding company for sanction of credit facilities to its subsidiary company, to the bank/ financial institutions, even when made without any consideration will be treated as a taxable supply of service or not, and if taxable, what would be the valuation of such supply of services.
Clarification: In such cases, the value shall be determined as per sub-rule (2) to Rule 28. Such a valuation is applicable irrespective of whether full ITC is available to the recipient of services or not.
Our Comments:
- Either the amendment or the clarification does not specifically state whether the amendment is retrospective or prospective. However, as regard to the GST applicability on corporate guarantee is concerned, going by the clarification issued, it implies that the amendment only proposes to clarify the valuation to be adopted. In other words, the levy exists even prior to the amendment. However, the value of the supply has been standardized by issuing the amendment.
- In case if any demands are already by the tax authorities by adopting the value which is in excess of 1% of the guaranteed amount, then the same can be restricted to 1% of the guaranteed amount. On the contrary, if the demand is made by considering the lesser value of supply, then the tax authorities may not be able to revise the demand as there is no provision for revising the show cause notices already issued. However, if the matter is in investigation stage, then the tax authorities may proceed with considering the value as per the amendment even for the past period.
- Time of supply shall be the time of issuance of the corporate guarantee. In case where the corporate guarantee is given on recurring basis, in our view, the payment of tax will have to be made each time the guarantee is renewed or freshly issued.
- If the transaction is between unrelated parties, then amendment will not apply. In such case, the value of the transaction shall be done by referring to the transaction value and the related valuation rules.
- If the entity giving the guarantee is located outside India, then it shall be treated as import of services in the hands of the entity in India who is getting the benefit of corporate guarantee. If the transaction pertains to the past years, then the entity can explore the possibility of availing the ITC of the tax payable on such supply subject to the provisions of section 16 (4).
Relevant circular and notification is attached along with this update. In case of any clarification required, kindly contact us. Click the below link to read /download the circular and notification.