Corporate guarantees, where a company vouches for the debt of another, are a common practice in India. But their treatment under the Goods and Services Tax (GST) regime has been a point of confusion. Recent amendments have clarified the taxability and valuation of these guarantees, particularly for related parties like parent-subsidiary transactions. This article dives into the current rules surrounding GST on corporate guarantees in India, explaining the applicable rate, valuation method, and exceptions.
Taxability
- Yes, corporate guarantees are taxable under GST. This clarification came into effect on October 26, 2023, vide Notification No. 52/2023 dated 26th October 2023.
- They are classified under SAC 99715 - Services auxiliary to financial services (other than insurance and pensions).
Time of Supply
- The time of supply for a corporate guarantee is no specified in the Act or clarified by the Department.
- One can alaways refer to Section 13 of CGST Act, 2017 and ToS can date of issue of invoice or date of provision of service as the case may be.
Transaction Value
- Determining the transaction value for a corporate guarantee, especially when provided to related parties (defined below) without consideration (fee), was a point of contention.
- A new valuation rule was introduced to address this. The transaction value for guarantees extended to related persons is now the higher of:
- 1% of the guaranteed amount
- Actual consideration charged, if any
GST Rate
- The GST rate applicable to corporate guarantees provided to related parties is 18%.
Exemption
- Guarantees provided by directors or promoters to their companies are exempt from GST.
- The CBIC vide Circular No. 204 ibid separately clarified about the taxability and valuation of 'personal guarantees' provided by a director on behalf of the company. The CBIC has taken reference from RBI Circular5 which clearly states that no consideration by way of commission, brokerage fees or any other form, can be paid to the director by the company, directly or indirectly, in lieu of providing personal guarantee to the bank for borrowing credit limits. Therefore, it is clarified that the open market value of the said transaction may be taken as zero and thus, the taxable value would be zero. In such a scenario, no tax is payable, except in exceptional cases where consideration is charged for undertaking the guarantee.
- It has also been clarified by the CBIC that the new valuation provision prescribed in respect of corporate guarantee would not apply on transactions relating to personal guarantee.
Related Persons
The concept of related persons is crucial for determining GST applicability on corporate guarantees. Here is the summarized person who falls under this category:
- Parent-subsidiary companies
- Sister concerns (companies having the same parent company)
- Companies under common control
- Individuals having a stake of more than 25% in the capital of the company providing or receiving the guarantee
Note: "Related Persons" are defined under Section 15 of CGST Act, 2017
Example 1:
Company A (parent company) provides a guarantee for a loan availed by its subsidiary, Company B, from a bank. Since they are related parties, the guarantee issuance by Company A will attract GST at 18%. The transaction value will be the higher of 1% of the loan amount or any consideration charged by Company A.
Example 2:
Mr. X, a director in Company Y, provides a personal guarantee for a loan taken by the company. This guarantee is exempt from GST.
Important Note
The new valuation rule for corporate guarantees applies prospectively, i.e., to guarantees issued after October 26, 2023 vide Notification No. 52/2023 (Central Tax) dated 26th October 2023. Existing guarantees are not impacted.
Conclusion
The recent amendments to the CGST Rules have provided much-needed clarity on the GST treatment of corporate guarantees. Businesses should be aware of these regulations and factor in the potential GST implications when issuing or receiving corporate guarantees, especially when dealing with related parties.
Disclaimer: This article is for informational purposes only and should not be construed as tax advice. It's recommended to consult a tax professional for specific guidance on your situation.
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