April 10, 2024

The taxability of corporate guarantees under GST has been a contentious issue due to the lack of specific provisions. Corporate guarantees involve a corporate entity ensuring another entity’s performance or discharging its liability in case of default. Recent amendments to the Central Goods and Services Tax Rules (CGST Rules) address the valuation of corporate guarantees extended by related persons. What is Corporate Guarantee? 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 always 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. Relevant GST Provisions Supply between related persons, even without consideration, is treated as a taxable supply under GST. Persons owning 25% or more of voting stock in two entities are deemed related. Valuation of supply between related persons is specified in Rule 28 of CGST Rules. Recent Developments CGST (Fourth Amendment) Rules, 2023, introduced a new valuation provision for corporate guarantees provided on behalf of a related person. Effective from 26-10-2023, the value of supply of services for corporate guarantees is deemed to be higher of 1% of the guarantee amount or actual consideration.CBIC issued Circular No. 204/16/2023-GST, clarifying the taxability and valuation of corporate guarantees. Exclusions and Clarifications Personal guarantees provided by directors are clarified to have zero taxable value unless consideration is charged. The new valuation provision does not apply to personal guarantees. The Circular emphasizes the overriding effect of the new provision on existing valuation methods. Intricacies and Unresolved Issues Various intricacies remain unaddressed, including the service element in corporate guarantees, the determination of the actual recipient, and the place of supply. Questions arise regarding the treatment of prior-period cases under litigation, differentiation between personal and corporate guarantees, and the non-obstante clause’s impact on seamless credit flow. The rationale behind the 1% deeming fiction, adoption of transaction value, and the timing of supply in guarantee transactions are unclear.  GST Rate and HSN Code for Corporate Guarantee The GST rate on corporate guarantee provided in favour of parent companies, subsidiaries, and related parties is 18%. This rate is applied to either 1% of the guaranteed amount or the actual consideration, with the higher of the two determining the tax liability. Also, the HSN code for corporate guarantee is 999799. FAQs Is corporate guarantee a related party transaction? Yes, corporate guarantees are considered related party transactions, attracting an 18% GST rate.  Is corporate guarantee taxable under GST? Corporate guarantees are taxable under GST at a rate of 18%, calculated on either 1% of the guaranteed amount or the actual consideration, with exemptions for directors or promoters. What is the SAC of corporate guarantee? For GST, corporate guarantees use SAC 99715, categorised under Services Auxiliary to financial services (excluding insurance and pensions), making it easier to do accurate GST reporting. 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