Guarantee Under GST
MEANING OF GUARANTEE:
-
Guarantee
has not been defined in the GST Law. The reference is to be taken from the
Indian Contracts Act, 1872. Guarantee is defined under Section 126 of the
Indian Contracts Act, 1872. A guarantee is a promise made by one person to be
responsible for the debt or obligation of another person.
The three parties to the contract are,
·
The person who gives the guarantee
(Guarantor).
·
The person on whose behalf the guarantee is
given (Principal Debtor). And
·
The person to whom the guarantee is given
(Creditor).
TYPE
OF GUARANTEE: -
·
Personal Guarantee.
·
Bank Guarantee.
· Corporate Guarantee.
IS GUARANTEE COVERED UNDER THE DEFINITION OF SUPPLY?
Personal Guarantee:
- As per Explanation (a) to section 15 of CGST Act, the director
and the company are to be treated as related persons. As per clause (c) of
sub-section (1) of section 7 of the CGST Act, 2017, read with S. No. 2 of
Schedule I of CGST Act, supply of goods or services or both between related
persons, when made in the course or furtherance of business, shall be treated
as supply even if made without consideration. Accordingly, the activity of
providing personal guarantee by the Director to the banks/ financial institutions
for securing credit facilities for their companies is to be treated as a supply
of service, even when made without consideration.
Corporate
guarantee by one company to another Company: - Where the
corporate guarantee is provided by a company to the bank/financial institutions
for providing credit facilities to the other company, where both the companies
are related, the activity is to be treated as a supply of service between
related parties as per provisions of Schedule I of CGST Act, even when made
without any consideration.
Corporate
guarantee by Holding company to Its Subsidiary: -
Similarly, where the corporate guarantee is provided by a holding company, for
its subsidiary company, those two entities also fall under the category of
‘related persons’. Hence the activity of providing corporate guarantee by a
holding company to the bank/financial institutions for securing credit
facilities for its subsidiary company, even when made without any
consideration, is also to be treated as a supply of service by holding company
to the subsidiary company, being a related person, as per provisions of
Schedule I of CGST Act.
VALUATION OF GUARANTEE: -
Personal Guarantee: -
Rule 28 of CGST Act, 2017: - CGST Rule 28 is about determining the value of goods or services when they are exchanged between related parties (like a company and its directors), except when an agent is involved. Normally, the value of these services is based on their "open market value" – what they would cost if bought or sold in the market.
RBI Guidelines on Personal Guarantees: - The Reserve Bank of India (RBI) has guidelines, vide Para 2.2.9 of its Circular No. RBI/2021-22/121 dated 9th November, 2021, for banks about when and how to take personal guarantees from people like directors or major shareholders of companies. The key point here is that directors or other important people in a company should not be paid for giving personal guarantees. The company and the guarantors must agree that no money will be paid, either directly or indirectly, for these guarantees.
Connection Between CGST Rule 28 and RBI Guidelines: -
·
According to RBI's guidelines, a company
cannot pay its directors any money (like a fee or commission) for giving a
personal guarantee to a bank.
·
Since no payment can be made, there is no
"open market value" for this service, because it's not something that
has a price.
·
As a result, under CGST Rule 28, the value of
this service (the personal guarantee) is considered to be zero.
·
Because the value is zero, no GST (Goods and
Services Tax) is due on this service.
Special Cases: - However, there might be situations
where a director, who is no longer part of the company, continues to provide a
guarantee because the new management cannot provide one. Or there might be
other special cases where the company does pay the director or other key people
for the guarantee. In these special cases, if any payment is made to the
guarantor, the value of the service for tax purposes would be the amount of
that payment, and GST would be applicable on that amount.
In summary:
-
If no
payment is made to a director for giving a personal guarantee, the service has
no market value, so no GST is due.
If a
payment is made, then the value for tax purposes is the amount of that payment,
and GST would apply.
Corporate Guarantee: -
A new rule
(sub-rule 2) has been added to Rule 28 of the CGST Rules through a notification
(No. 52/2023) on October 26, 2023. This rule specifically deals with how to
calculate the taxable value when a related person, like a holding company,
provides a corporate guarantee (a promise to repay a loan if the borrower
fails) to a bank or financial institution on behalf of another related person,
like a subsidiary company. (After amended by Notification No. 12/2024 – Central
Tax_10.07.2024)
What does the new sub-rule (2) say?
1.
Value of the Corporate Guarantee: -
·
The taxable value of the corporate guarantee
provided by one related person to another will be considered as 1% of the
amount of the guarantee per year, or the actual amount paid (if any), whichever
is higher.
· For example, if a holding company guarantees a loan of ₹10,00,000 for its subsidiary, the taxable value would be 1% of ₹10,00,000 per year, which is ₹10,000, unless the company is actually paying more than this amount for the guarantee.
2.
Special Case for Input Tax Credit: -
·
If the company receiving the guarantee (the
recipient) can claim the full input tax credit (which means they can deduct the
GST they paid from their own GST liability), then the value declared in the
invoice will be accepted as the taxable value.
·
This means that in some cases, the value on
the invoice itself might be used directly for tax purposes if the company can
claim the full tax credit.
3.
In Summary: -
·
When a company provides a corporate guarantee
to a bank for a related company, the tax value will generally be 1% of the
guarantee amount per year or the actual amount paid for the guarantee,
whichever is higher.
·
If the company that receives the guarantee can
claim full input tax credit, the value on the invoice will be used for tax
purposes.
THE APPLICABILITY OF THE REVERSE CHARGE
MECHANISM (RCM) ON A PERSONAL GUARANTEE PROVIDED BY A DIRECTOR TO A COMPANY CAN
BE UNDERSTOOD AS FOLLOWS: -
· Under RCM, the recipient of goods or services is liable to pay the GST instead of the supplier. Normally, the supplier collects and pays the tax, but under RCM, the responsibility shifts to the recipient.
2
Personal Guarantee Provided by Directors:
-
·
Directors may provide personal guarantees to
banks or financial institutions to secure loans or credit facilities for the company.
· The question is whether this act of providing a personal guarantee is considered a "supply" of service under GST, and if so, whether the company (as the recipient) should pay GST under RCM.
3
Key Considerations: -
· Nature of the Activity: -
a)
If the director provides the personal
guarantee as part of their employment duties (i.e., they are an employee of the
company and not engaged in the business of giving guarantees), this could be
viewed as a service provided by an employee to the employer.
b) As per Schedule-III of the CGST Act, 2017, services provided by an employee to the employer in the course of or in relation to employment are not treated as a "supply" of goods or services. Therefore, such activities are not subject to GST.
· Supply in the Course of Business: -
a) For an activity to be taxable under GST, it must be done "in the course or furtherance of business" as per Section 7(1) of the CGST Act. Since directors are not in the business of providing personal guarantees, it can be argued that this activity does not qualify as a taxable supply.
· RCM Applicability: -
a)
If the personal guarantee provided by the
director is deemed not to be a "supply" under GST, then RCM would not
apply, and no GST would be payable by the company.
b) However, if the guarantee is seen as a separate service provided by the director (not in their capacity as an employee), then it might be considered a taxable supply, and the company could be required to pay GST under RCM.
4
Practical Interpretation: -
·
Most interpretations suggest that when a
director provides a personal guarantee as part of their employment duties, it
is not considered a taxable supply, and therefore, RCM does not apply. This is
especially true if the guarantee is required as part of the director’s role and
no separate consideration (payment) is given for providing the guarantee.
· However, if the director is compensated for providing the guarantee or if it is provided outside the scope of employment, the transaction might be treated differently, and RCM could potentially apply.
Conclusion: -
·
RCM does not generally apply to personal
guarantees provided by directors in their capacity as employees of the company,
since these are not considered taxable supplies under the CGST Act.
·
However, if there is any payment involved or
the guarantee is provided outside the employment relationship, there might be a
different interpretation, and RCM could apply. It is always advisable to
consult with a tax professional to assess the specific circumstances.
SAC CODE: -
The Service Accounting Code (SAC) for a guarantee service falls under the broader category of financial services. The specific SAC code for "Guarantee Services" is 9971. This category includes various financial services, including:997199 - Other financial services not elsewhere classified, which may include services related to guarantees.
GST RATE: -
18%
HERE SOME PRACTICAL QUESTION AS PER CIRCULAR
NO. 225/19/2024-GST_11.07.2024.
Question:
-
Whether
sub-rule (2) of rule 28 of CGST Rules will apply to the corporate guarantees
issued prior to insertion of the said sub-rule on 26th October 2023? Also,
where intra-group corporate guarantees have been issued before 26th October
2023, which are still in force today, would they be liable to pay GST on “1% of
the amount of such guarantee offered” on such guarantees?
Answer: -
It is to
be clarified that the supply 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 taxable even before the insertion of
sub-rule (2) in rule 28 of CGST Rules with effect from 26th October 2023. Rule
28(2) of CGST Rules is only for determination of the value of the taxable
supply of providing corporate guarantee to any banking company or financial
institution by a supplier to a related recipient, on behalf of the said
recipient and not regarding the taxability of the said supply itself. Prior to
the insertion of the said 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.
Question:
-
In cases
where the corporate guarantee is provided for a particular amount, whereas the
loan is only partly availed or not availed at all by the recipient, what will
be the value of supply of corporate guarantee. Also, whether the recipient
would be eligible to avail full ITC (Input Tax Credit) even before total loan
is disbursed?
Answer: -
The
activity of supply of the service of providing a corporate guarantee is not
linked with the actual disbursal of the loan. The service that is provided by
the guarantor to the guarantee is that of taking on the risk of default.
Therefore, it is clarified that the value of supply of the service of providing
a corporate guarantee will be calculated based on the amount guaranteed and
will not be based on the amount of loan actually disbursed to the recipient of
the corporate guarantee. 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.
Question:
-
In the
case of takeover of existing loans, since there is merely an assignment of an
already issued corporate guarantee, whether GST would be applicable again?
Answer: -
In the
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, the supplier of the service is the corporate entity providing the
corporate guarantee and the recipient is the related 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.
Question:
-
Where
corporate guarantee is provided by more than one entity / co-guarantor, what is
the amount on which GST is payable by each co-guarantor?
Answer: -
In cases
where corporate guarantee is being provided by multiple related entities, the
value of such services of providing corporate guarantee shall be the sum of the
actual consideration paid/ payable to co-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.
Question:
-
Where
intra-group corporate guarantee is issued, whether GST may be paid by the
recipient under reverse charge, as in the absence of actual invoice and
payment, the recipient entity may not be able to claim input tax credit of tax
paid by the domestic guarantor?
Answer: -
It is
clarified that in cases where domestic corporates issue intra-group guarantees,
GST is to be paid under forward charge mechanism, and invoice is to be issued
by the supplier of the service of providing corporate guarantee to the related
recipient under Section 31 of CGST Act, 2017 read along with the relevant
rules. However, in cases where such guarantee is provided by the foreign/
overseas entity for a related entity located in India, then GST would be
payable under reverse charge mechanism, by the recipient of service, i.e., the
related entity located in India.
Question:
-
Whether
the discharge of tax liability on corporate guarantee @ 1% of such guarantee
offered is to be done one time or on yearly basis or on monthly basis and when
issued for a fixed term of say, five years or ten years as per tenure of the
loan?
Answer: -
Rule 28(2)
of CGST Rules has been amended retrospectively with effect from 26th October
2023, vide notification No. 12/2024 -CT dated 10.07.2024. Therefore, it is
clarified that 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 shall be one per cent of the amount 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.
Question:
-
Whether
the benefit of second proviso to sub-rule (1), which states that value declared
in invoice is deemed to be the open market value in cases where full input tax
credit is available to the recipient of services, is not applicable in cases
falling under sub-rule (2)?
Answer: -
Proviso
has been inserted in sub-rule (2) of Rule 28 of CGST Rules, retrospectively
with effect from 26th October 2023 vide notification No. 12/2024 -CT dated
10.07.2024, similar to that provided in the second proviso to sub-rule (1) of
Rule 28 of CGST Rules, to provide the benefit in cases involving supply of
service of corporate guarantees provided between related persons. 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.
Question:
-
Whether
the valuation in terms of Rule 28(2) of CGST Rules will apply to the export of
the service of providing corporate guarantee between related persons?
Answer: -
As per the
amendment done in sub-rule (2) of rule 28 of CGST Rules retrospectively w.e.f.
26th October 2023 vide notification No. 12/2024 -CT dated 10.07.2024, the
provisions of the said sub-rule will not apply in cases where the recipient of
the services of providing 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.
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