Clarification on various issues pertaining to taxability and valuation of supply of services of providing corporate guarantee between related persons.

Circular No.: 225/19/2024-GST
Date of Circular: 11th July 2024
Relevant Sections and Rules:

• CGST Act, 2017:
  • Section 15: Value of taxable supply
  • Section 168(1): Power to issue instructions
• CGST Rules, 2017:
  • Rule 28(2): Valuation of corporate guarantee between related persons
  • Second proviso to Rule 28(1) – Deemed value when full ITC available
• Notifications:
  • Notification No. 52/2023-CT dated 26.10.2023
  • Notification No. 12/2024-CT dated 10.07.2024 (retrospective amendment to Rule 28(2))

Clarifications on Taxability and Valuation of Corporate Guarantee Between Related Persons:

1. Applicability of Rule 28(2):
   Rule 28(2) applies only to valuation of corporate guarantees issued to banks/financial institutions by one entity on behalf of a related recipient.
   ➤ It does not alter the taxability, which existed even prior to 26.10.2023.
   ➤ For guarantees issued/renewed before 26.10.2023, valuation as per then-existing Rule 28.
   ➤ For those issued/renewed on or after 26.10.2023, Rule 28(2) applies.
2. Guarantee Value Independent of Loan Disbursement:
   GST is leviable on the guaranteed amount, regardless of whether the loan is fully or partially disbursed.
   ➤ ITC is fully available to recipient if all conditions under the Act are satisfied, irrespective of loan disbursement status.
3. No GST on Mere Loan Takeover:
   If an existing loan is taken over by another lender without fresh issuance or renewal of guarantee,
   ➤ No new supply occurs; hence, no GST.
   ➤ If a new or renewed guarantee is issued, GST becomes applicable.
4. Co-Guarantor Valuation Rule:
   Where multiple related parties issue a corporate guarantee:

• If actual consideration paid > 1% of guaranteed amount: GST applies on actuals.
• If less: GST is payable proportionately by each co-guarantor on 1% of amount guaranteed by them.
  E.g., If A guarantees ₹60 lakh and B ₹40 lakh → A pays GST on ₹60K, B on ₹40K.

5. Tax to Be Paid Under Forward or Reverse Charge:

• Domestic entities: Must issue invoice and pay GST under forward charge.
• Foreign entities: GST to be paid by Indian related recipient under reverse charge.

6. Valuation Based on Tenure of Guarantee:

• GST valuation = 1% per annum of guarantee amount × no. of years (or actual consideration, whichever is higher).
• For partial years, apply proportionate valuation (e.g., 6 months = 0.5%).
• For renewals, GST is payable at each renewal.

7. Applicability of Invoice Value as Deemed Value Where Full ITC Is Available:
   The benefit of the second proviso to Rule 28(1) (invoice value deemed as OMV if full ITC available) is now extended to Rule 28(2).
   ➤ Hence, where full ITC is available, the value declared in invoice is accepted as taxable value.
8. Export of Guarantee Services – Rule 28(2) Not Applicable:
   For export of corporate guarantee services (recipient located outside India), Rule 28(2) does not apply, as per retrospective amendment.
   ➤ In such cases, valuation is done as per general valuation provisions.

Source: Circular No.: 225/19/2024-GST