Circular No. 225/19/2024-GST [C10-7NT]

1.1 As per the recommendations of the GST Council, sub-rule (2) was inserted in Rule 28 of Central Goods and Services Tax Rules, 2017 (hereinafter referred to as the “CGST Rules”) vide Notification No. 52/2023-Central Tax dated 26th October, 2023 to provide for a specific clause for valuation of supply of services of providing corporate guarantee to any banking company or financial institution by an entity on behalf of a related person. Besides, Circular No. 204/16/2023-GST dated 27th October, 2023 was also issued as per the recommendations of the GST Council, to provide clarity regarding the applicability of the said sub-rule. Subsequently, based on the recommendations of the GST Council, sub-rule (2) of Rule 28 of CGST Rules has been amended retrospectively with effect from 26.10.2023 vide notification No. 12/2024 dated 10th July 2024.

1.2 In this regard, various representations have been received from trade and industry, seeking clarifications on various issues pertaining to the taxability and valuation of the supply of services of providing corporate guarantee between related persons as per the said rule.

2. Therefore, in order to ensure uniformity in the implementation of the provisions of law across the field formations, the Board, in exercise of its powers conferred by section 168 (1) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “CGST Act”), hereby clarifies the issues as under:

S. No. Issue Clarification

1 Whether sub-rule (2) of rule 28 It is to be clarified that the supply of service of of CGST Rules will apply to providing corporate guarantee to any banking company the corporate guarantees issued or financial institution by a supplier to a related prior to insertion of the said recipient, on behalf of the said recipient, was taxable sub-rule on 26th October 2023? even before the insertion of sub-rule (2) in rule 28 of Also, where intra-group CGST Rules with effect from 26th October 2023. Rule corporate guarantees have been 28(2) of CGST Rules is only for determination of the issued before 26th October value of the taxable supply of providing corporate 2023, which are still in force guarantee to any banking company or financial today, would they be liable to institution by a supplier to a related recipient, on behalf pay GST on “1% of the amount of the said recipient and not regarding the taxability of of such guarantee offered” on the said supply itself. Prior to the insertion of the said such guarantees? 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.

2 In cases where the corporate The activity of supply of the service of providing a guarantee is provided for a corporate guarantee is not linked with the actual particular amount, whereas the disbursal of the loan. The service that is provided by loan is only partly availed or the guarantor to the guarantee is that of taking on the not availed at all by the risk of default. Therefore, it is clarified that the value of recipient, what will be the supply of the service of providing a corporate value of supply of corporate guarantee will be calculated based on the amount guarantee. Also, whether the guaranteed and will not be based on the amount of loan recipient would be eligible to actually disbursed to the recipient of the corporate avail full ITC (Input Tax guarantee. Credit) even before total loan is disbursed? Further, it is also clarified that the recipient of the service of providing corporate guarantee shall be eligible to avail the ITC, subject to other conditions specified in the Act and the Rules made thereunder, irrespective of when the loan is actually disbursed to the recipient, and irrespective of the amount of loan actually disbursed.

3 In the case of takeover of In the service of providing corporate guarantee to any existing loans, since there is banking company or financial institution by a supplier merely an assignment of an to a related recipient, on behalf of the said recipient, the

already issued corporate supplier of the service is the corporate entity providing guarantee, whether GST would the corporate guarantee and the recipient is the related be applicable again? entity for whom the corporate guarantee is provided by the said supplier.

Therefore, if the loan issued by the banking company/ financial institution is taken over by another banking company/ financial institution, the said activity of taking over of the loan does not fall under the service of providing corporate guarantee to any banking company or financial institution by a supplier to a recipient. Therefore, it is clarified that in such cases, there will be no impact on GST, unless there is issuance of fresh corporate guarantee or there is a renewal of the existing corporate guarantee. However, if the takeover of the loan is followed/ accompanied by issuance of fresh corporate guarantee, then GST would be payable on the same.

4 Where corporate guarantee is In cases where corporate guarantee is being provided by more than one provided by multiple related entities, the value of such entity / co-guarantor, what is services of providing corporate guarantee shall be the the amount on which GST is sum of the actual consideration paid/ payable to co- payable by each co-guarantor? guarantors, if the said amount of total consideration is higher than one per cent of the amount of such guarantee offered. In cases where the sum of the actual consideration is less than one per cent of the amount of such guarantee offered, then GST shall be payable by each co-guarantor proportionately on one per cent of the amount guaranteed by them.

For instance, if there are two co-guarantors, A and B, who jointly provide a corporate guarantee to a banking/ financial institution on behalf a related recipient C for Rs. 1 crore, then A and B shall each pay GST on 0.5% of the amount guaranteed.

However, if in the above case of A and B providing corporate guarantee jointly to a banking/ financial institution on behalf a related recipient C for Rs 1 crore, A provides guarantee for 60% of the guarantee amount and B provides guarantee for the remaining 40% of the guaranteed amount, then GST shall be payable by A and B proportionately i.e., 0.6% and 0.4% of the amount guaranteed. This is to say that A shall pay GST on 1% of the amount guaranteed by A, i.e., 1% on Rs. 60 lakhs and B shall pay GST on 1% of the amount guaranteed by B, i.e., 1% on Rs. 40 lakhs.

5 Where intra-group corporate It is clarified that in cases where domestic corporates guarantee is issued, whether issue intra-group guarantees, GST is to be paid under GST may be paid by the forward charge mechanism, and invoice is to be issued

recipient under reverse charge, by the supplier of the service of providing corporate as in the absence of actual guarantee to the related recipient under Section 31 of invoice and payment, the CGST Act, 2017 read along with the relevant rules. recipient entity may not be able However, in cases where such guarantee is to claim input tax credit of tax provided by the foreign/ overseas entity for a related paid by the domestic entity located in India, then GST would be payable guarantor? under reverse charge mechanism, by the recipient of service, i.e., the related entity located in India.

6 Whether the discharge of tax Rule 28(2) of CGST Rules has been amended liability on corporate guarantee retrospectively with effect from 26th October 2023, @ 1% of such guarantee vide notification No. 12/2024 -CT dated 10.07.2024. offered is to be done one time or on yearly basis or on Therefore, it is clarified that the value of supply monthly basis and when issued of the service of providing corporate guarantee to a for a fixed term of say, five banking company or a financial institution on behalf of years or ten years as per tenure a related recipient shall be one per cent of the amount of the loan? guaranteed per annum or the actual consideration, whichever is higher.

Accordingly, the value of supply of the service of providing corporate guarantee to a banking company or a financial institution on behalf of a related recipient for a particular number of years shall be one per cent of the amount of such guarantee offered multiplied by the number of years for which the said guarantee is offered or the actual consideration whichever is higher. In addition to the above, in cases where the corporate guarantee is provided for a period less than a year, say 6 months (half a year), then in those cases as well, the valuation may be done on proportionate basis for the said period, i.e., in this case, the value of the said supply of services may be taken as half of one per cent of the amount of such guarantee offered (6/12 * one per cent), or the actual consideration, whichever is higher.

To illustrate the same, if a corporate guarantee is issued for a period of say five years, then the value of such guarantee is to be calculated at one per cent per year of the amount of such guarantee offered, or the actual consideration, whichever is higher, i.e., the value of such corporate guarantee provided would be 5% of the amount guaranteed or the actual consideration, whichever is higher. Therefore, GST would be payable on such amount at the time of issuance of such corporate guarantee, i.e., 5% of the amount guaranteed or the actual consideration, whichever is higher.

However, if a corporate guarantee is issued, say for a period of one year and is renewed five times, for a

period of one year each, then tax would be payable on one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher, on the issue of such corporate guarantee in the first year as well as on every renewal in subsequent years.

7 Whether the benefit of second Proviso has been inserted in sub-rule (2) of proviso to sub-rule (1), which Rule 28 of CGST Rules, retrospectively with effect states that value declared in from 26th October 2023 vide notification No. 12/2024 - invoice is deemed to be the CT dated 10.07.2024, similar to that provided in the open market value in cases second proviso to sub-rule (1) of Rule 28 of CGST where full input tax credit is Rules, to provide the benefit in cases involving supply available to the recipient of of service of corporate guarantees provided between services, is not applicable in related persons. cases falling under sub-rule (2)? Accordingly, it is clarified that in cases involving the supply of service of corporate guarantees provided between related persons, where full input tax credit is available to the recipient of services, the value declared in the invoice shall be deemed to be the value of supply of the said service.

8 Whether the valuation in terms As per the amendment done in sub-rule (2) of rule 28 of of Rule 28(2) of CGST Rules CGST Rules retrospectively w.e.f. 26th October 2023 will apply to the export of the vide notification No. 12/2024 -CT dated 10.07.2024, the service of providing corporate provisions of the said sub-rule will not apply in cases guarantee between related where the recipient of the services of providing persons? corporate guarantee between related persons is located outside India. Accordingly, the provisions of the said sub-rule shall not apply to the export of the services of providing corporate guarantee between related persons.

3. It is requested that suitable trade notices may be issued to publicize the contents of this Circular.

4. Difficulties, if any, in implementation of this Circular may please be brought to the notice of the Board. Hindi version would follow.