Performance Guarantee

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RAJAT (Querist)
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15 February 2010 One of my client(Contractor/ Builder) has to give Performance Guarantee , question is that service tax is applicable on this guarantee or not ?
the amount involved is the whole of the performance guarantee amount.
Kindly Revert on this urgently as he has to enter into a contract

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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15 February 2010 Are you asking Bank charges for issuing performance guarantee, on that service tax or some other

Aashok Kumar Sharma online

Aashok Kumar Sharma online

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10 August 2024 ### **Performance Guarantee and Service Tax**

**1. Nature of Performance Guarantee:**
- **Performance Guarantee:** This is a financial guarantee given by a contractor or builder to ensure the satisfactory completion of a project or fulfillment of contract obligations. It is typically provided in the form of a bank guarantee or a performance bond.

**2. Service Tax Applicability:**
- **Service Tax and Performance Guarantee:** As per the service tax regulations, service tax is generally not applicable to performance guarantees. This is because a performance guarantee is not considered a service but rather a financial instrument or commitment.
- **Clarification from CBEC:** The Central Board of Excise and Customs (CBEC) has clarified that performance guarantees are not subject to service tax. The guarantee is a financial arrangement and does not fall under the taxable service categories.

**3. Relevant Sections and Rules:**
- **Service Tax Act:** Under the Finance Act, 1994, which governs service tax, the service tax is applicable to services provided, but performance guarantees are not categorized as a service.
- **Circulars and Notifications:** There are no specific circulars or notifications imposing service tax on performance guarantees. The primary consideration is whether the activity constitutes a service under the service tax law.

**4. Impact on Contract:**
- **No Service Tax on Performance Guarantee:** Since service tax is not applicable, your client will not need to charge or pay service tax on the performance guarantee amount.
- **Accounting for Performance Guarantee:** The performance guarantee amount should be accounted for as a liability or financial commitment rather than a taxable transaction.

**5. Documentation and Compliance:**
- **Documenting the Guarantee:** Ensure that the performance guarantee is properly documented and clearly stated in the contract.
- **No Service Tax Invoice:** Since service tax does not apply, there is no need to issue a service tax invoice for the performance guarantee.

### **Summary:**
Performance guarantees provided by a contractor or builder are not subject to service tax. The amount involved in the performance guarantee does not attract service tax, and the guarantee should be treated as a financial arrangement rather than a taxable service.

For any updates or specific cases, you may want to check the latest notifications from the CBEC or consult with a tax professional to ensure compliance with current regulations.

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