GST Implications

on Corporate
Guarantee
Flow of Discussion

Understanding the term “Guarantee”

Type of Guarantees

Basic Definitions in GST

Taxability Under the Service Tax Regime & Before 26th October 2023

Taxability Post 26th October 2023

Posers

Questions & Answers

Understanding the term “Guarantee”
What is Guarantee ??

• Guarantee is not explicitly defined in GST Law, but reference is to be taken from the Indian Contracts Act, 1872.
• Section 126 of the Indian Contracts Act defines Guarantee as a promise made by one person to be accountable for
the debt or obligation of another person.
• The three parties involved in a contract are:

Guarantor : The person Creditor : The person on whose

providing the guarantee behalf the guarantee is given

A Ltd. C Ltd.

Principal Debtor : The person on

whose behalf the guarantee is given

B Ltd.
Type of Guarantees
Type of Guarantees

1. PERSONAL GUARANTEE
• A personal guarantee is a commitment made by an individual—commonly a director or partner of a company or
firm—to personally fulfill a financial obligation if the business entity fails to do so. It serves as an assurance to the
lender that the debt will be repaid, even if it means using the guarantor’s personal assets.
• Generally, fees not charged [RBI’s Circular No. RBI/2021-22/121 dated 9th November 2021, no consideration by way
of commission, brokerage fees or any other form, can be paid to the director by the company, directly or
indirectly, in lieu of providing personal guarantee to the bank for borrowing credit limits.]

2. BANK GUARANTEE
• A bank guarantee is a commitment made by a bank to a third party, assuring the third party that the bank will honor
claims or fulfill obligations on behalf of its customer in the event of non-performance by the customer.
• Typically charged as a fee or commission.
Type of Guarantees

3. CORPORATE GUARANTEE
• It is a formal, legally binding agreement in which one company (referred to as the corporate guarantor) agrees to
assume responsibility for the repayment of a debt or the fulfillment of certain obligations if the original borrower
(known as the principal debtor) fails to meet their commitments to a lender.

• Generally, corporate guarantee is seen in the below cases:

 Parent-Subsidiary Support: Parent guarantees loans for subsidiaries lacking credit strength.
 Group Financing: Intra-group guarantees to secure better loan terms.
 New Ventures/Start-ups: Backing for newly formed entities or joint ventures.
 Overseas Operations: Guarantees for foreign subsidiaries securing local financing.
 Acquisition Deals: Guaranteeing loans used for business acquisitions or buyouts.
 Performance Obligations: Ensuring fulfillment of project or service contracts.
 Trade Credit: Guaranteeing payments to suppliers or vendors.
Basic Definitions in GST
Basic Definitions in GST
 Section 7(1)(a) : For the purposes of this Act, the expression “supply” includes––
all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal
made or agreed to be made for a consideration by a person in the course or furtherance of business;

 Schedule I : ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION

 Transfer of Business Assets where ITC has been availed and assets are permanently transferred/disposed.
 Transactions Between Related/Distinct Persons
 Supply of goods by principal to agent or vice versa when acting on behalf of each other.
 Import of Services from Related Persons for business use.

 Rule 28 – Valuation for Related/Distinct Person Supplies : Applies to supplies between related or distinct persons,
excluding agents.
 Valuation hierarchy: (a) Open Market Value (OMV)
 (b) If OMV not available → Value of like kind and quality
 (c) If (a) & (b) fail → Apply Rule 30 (cost-based) or Rule 31 (best judgment)
 If recipient has full ITC, the invoice value is deemed as OMV.
Basic Definitions in GST

 Section 2(31) defines Consideration as below :

“consideration” in relation to the supply of goods or services or both includes––

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the
inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not
include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of
goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the
Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment
made for such supply unless the supplier applies such deposit as consideration for the said supply;
Basic Definitions in GST

 For the Purpose of these Act, "related parties" are defined as follows:

a) persons shall be deemed to be "related persons" if-

(i) such persons are officers or directors of one another's businesses;
(ii) such persons are legally recognised partners in business;
(iii) such persons are employer and employee;
(iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting
stock or shares of both of them;
(v) one of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person;
(vii) together they directly or indirectly control a third person; or
(viii) they are members of the same family;
Taxability Under the Service Tax Regime &
Before 26th October 2023
Taxability under Service Tax Regime & Before 26th Oct,23

Service Tax Regime

Consideration Involved ? Taxability

Yes Taxable as “Supply of Service”

No No – As it lacks consideration

Issues in Taxability (Service Tax Era)

• Services are taxable only if consideration exists, even between related parties.
• This means that “No tax if there's no supply for consideration”.
• Valuation Rules (2006) apply only when consideration exists. If no consideration, valuation rules are irrelevant.
Taxability under Service Tax Regime & Before 26th Oct,23

Taxability before 26th October, 2023

 If with Consideration : Treated as a taxable supply of service under GST.

 If without Consideration : No clear rules under GST initially, leading to various interpretations.
Common positions taken by taxpayers included:
 Carried Forward Service Tax Treatment: Viewed as non-taxable if given without consideration.
 Not a Supply: Argued that corporate guarantees between related/distinct persons were not in the course
of business, and hence, not a "supply".
 Actionable Claim: Some classified it as an actionable claim, making it neither goods nor services, and thus,
non-taxable.
 Valuation Issues: Rule 28 deemed inapplicable; open market value was hard to determine as each
guarantee varied party-to-party.
Taxability under Service Tax Regime & Before 26th Oct,23

Taxability before 26th October, 2023

 Due to lack of clarity and inconsistent interpretations, widespread confusion existed.

 These issues prompted the GST Council to deliberate and bring clarity on the taxability of corporate guarantees.
Taxability Post 26th October 2023
Taxability Post 26th October 2023

Discussions in 52nd GST Council Meeting

 Holding Co. & Subsidiary Co. are related persons & as per CGST Act, guarantees between them (even without
consideration) are deemed as "supply" under Schedule I of CGST Act.

 Valuation Challenges : Rule 28 applies, but practical issues arise due to no standard benchmarks and Valuation
depends on multiple factors (creditworthiness, amount, financials, bank terms). Therefore, applying Rule 28
becomes impractical.

 Full ITC vs. Partial ITC

o If full ITC available → Invoice value = OMV. (Specifies in Rule 28)
o If not → Fair valuation becomes difficult, increasing tax disputes.

 Hence, in case where full ITC is not available, govt. proposes 1% of the guaranteed amount as the standard
taxable value.
(aligned with Safe Harbour Rules under Income Tax)
Taxability Post 26th October 2023

Insertion of New Rule 28(2) [with effect from 26-10-2023)

 Valuation Rule 28(2): For Corporate Guarantees provided to related persons in India, the valuation will be either:

• One percent of the guaranteed amount per annum, or

• The actual consideration received
• whichever is higher

 Eligibility for Input Tax Credit (ITC): If the recipient of the said service is eligible for full ITC, the value declared on the face of invoice
shall be deemed to open market value of the supplied services.

 Cases where above valuation mechanism specified u/r 28(2) shall not apply:

 International Guarantees: The valuation rule does not apply when a corporate guarantee is provided by an Indian company
to a related company located outside India.

 Domestic Guarantees with Full ITC: When a Corporate Guarantee is provided to a related company within India and the
recipient is eligible for full ITC, the declared transaction value by the service supplier (which could be NIL) is used for GST
valuation purposes.
Taxability Post 26th October 2023

Related Party Located in India

[Rule 28(2)]

Whether ITC available to

Recipient?

No Yes

Value of supply shall be Value of Supply shall be

Value declared on Invoice
higher of
(which may be NIL)
1% Guarantee Amount p.a.
OR
Actual Consideration GST Payable @ 18%
Charged
GST applicability in case of Corporate Guarantee in different Scenarios

GST applicability on Corporate Guarantee transaction between Related parties

Service Provider Service Recipient Nature of Supply ITC Available Valuation Rule *
Holding Co. Yes Rule 28(2) - 1st Proviso
Inter/Intra
(In India) Subsidiary Co. No Rule 28(2)
Holding Co. (In India) Inter Yes Rule 28(2) - 1st Proviso
(O/s India) [Import of Service] No Rule 28(2)

Note (*): Impact on Valuation due to ITC Availability:

 Proviso to Rule 28(2) - If the recipient company is eligible for full ITC, the value declared in the invoice (which may be
NIL) is accepted.

 Rule 28(2) - If ITC is not available, the value of the supply is determined as the higher of 1% of the guaranteed amount
per annum OR the Actual consideration charged.

Service Provider Service Recipient Nature of Supply Export service Valuation Rule
Holding Co. Subsidiary Co. Rule 28(2) does not apply. Valuation
Inter Yes/No
(In India) (O/s India) to be done based on Rule 28(1).
Summary on GST Applicability on Corporate Guarantee

Summary on GST Applicability on Corporate Guarantee

Whether ITC available to

Recipient?

No Yes

Before 26.10.2023 On or after 26.10.23 Value of Supply shall be

Value declared on Invoice
(which may be NIL)
Value of Supply shall be Value of supply shall be higher of
open market value to be 1% Guarantee Amount p.a. OR
determined vide 28(1) Actual Consideration Charged
GST Payable @ 18% in case any
value is declared on invoice
Posers
Posers

Question :

A Ltd. provides a corporate guarantee to XYZ Bank on behalf of Z Ltd for which A. Ltd does not charge any
consideration from Z Ltd.
Analysis of GST Applicability Based on Voting Rights

Voting Rights in GST Applied on

Is Related Party?
Z Ltd. Corporate Guarantee?
15%
25%
30%
Posers

Solution :

A Ltd. provides a corporate guarantee to XYZ Bank on behalf of Z Ltd for which A. Ltd does not charge any
consideration from Z Ltd.
Analysis of GST Applicability Based on Voting Rights

Voting Rights in GST Applied on

Is Related Party?
Z Ltd. Corporate Guarantee?
15% No No
25% Yes Yes
30% Yes Yes
Posers

Question :

PQR Ltd. has provided a corporate guarantee of ₹500 crore to HDFC Bank on behalf of XYZ Ltd., which has availed a
loan of ₹700 crore. Notably, PQR Ltd. has not charged any consideration from XYZ Ltd. for extending this guarantee.
What will be the base for calculating the value of the said supply ?
Issue:
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?

Clarification:
Giving a corporate guarantee is a service that has nothing to do with when the loan
is actually given. The guarantor is providing a service by taking on the risk that the
borrower might not repay. So, the value of this service is based on the total amount
guaranteed, not on how much of the loan is actually handed over to the borrower.

225/19/2024-
GST
Issue:
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?

Clarification:
If a loan given by one bank or financial institution is taken over by another, this
takeover is not treated as a service of giving a corporate guarantee. So, no GST is
applicable just because the loan was taken over.
However, if a new corporate guarantee is issued or the existing one is renewed
during the takeover, then GST will apply on that guarantee.

225/19/2024-
GST
Issue:
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?

Clarification:
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.

225/19/2024-
GST
Example: GST on Corporate Guarantee Provided by Multiple Guarantors

 Scenario: Three corporate entities (Company A, Company B, and Company C) jointly provide a corporate guarantee for a loan of
₹ 10 crores taken by their related entity, Company D, from a bank. The proportionate shares and the actual consideration for providing the
guarantee vary as follows:
Particulars Company A Company B Company C Total
Proportionate Share of Guarantee 50% 30% 20% 100%
Proportionate Share of Guarantee (1% Value) 5 Lacs 3 Lacs 2 Lacs 10 Lacs
Case 1

Actual Consideration 4.5 Lacs 2.7 Lacs 1.8 Lacs 9 Lacs

Value of Supply (Higher Value) 5 Lacs 3 Lacs 2 Lacs 10 Lacs
GST @ 18% 0.9 Lacs 0.54 Lacs 0.36 Lacs 1.8 Lacs

Particulars Company A Company B Company C Total

Proportionate Share of Guarantee 50% 30% 20% 100%
Proportionate Share of Guarantee (1% Value) 5 Lacs 3 Lacs 2 Lacs 10 Lacs
Case 2

Actual Consideration 3 Lacs 4 Lacs 1.5 Lacs 8.5 Lacs

Value of Supply (Higher Value) 5 Lacs 4 Lacs 2 Lacs 11 Lacs
GST @ 18% 0.9 Lacs 0.72 Lacs 0.36 Lacs 1.98 Lacs
Issue:
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?

Clarification:
Domestic guarantees follow the forward charge mechanism, while guarantees by
foreign entities for Indian related entities follow the reverse charge mechanism.

225/19/2024-
GST
Issue:
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?

Clarification:
GST is payable annually based on 1% of the guaranteed amount or actual
consideration, whichever is higher, and proportionately for periods less than a year.
For multi-year guarantees, the value is calculated for the total period at once.

Example: 5-year guarantee for ₹1 crore: Value = ₹5 lakhs (1% × 5

years) or actual consideration, whichever is higher.

225/19/2024-
GST
Example: Frequency and Basis of GST Payment on Corporate Guarantees

 Scenario: A corporate entity (Company A) provides a corporate guarantee on behalf of a related entity (Company B) to a bank for a loan.
The corporate guarantee is issued for a period of 5 years renewed every year, and the recipient Company B is not eligible for full Input Tax
Credit (ITC). The valuation based on different scenarios is as follows:
Particulars Case 1 Case 2
Guaranteed Amount 100 Crore 100 Crore
Guarantee provided for 5 Years 5 Years
1% of Guaranteed Amount per Annum 100 Lacs 100 Lacs
Actual Consideration per Annum 80 Lacs 120 Lacs
Value of Supply for each year 100 Lacs 120 Lacs
GST @ 18% 18 Lacs 21.60 Lacs

 Proportionate Calculation for Less Than a Year: If the corporate guarantee is provided for a period less than one year, the valuation based
on different scenarios is as follows:

Particulars Case 1 Case 2 Case 3 Case 4

Guaranteed Amount 100 Crore 100 Crore 100 Crore 100 Crore
Guarantee provided for 6 Month 6 Month 9 Month 9 Month
1% of Guaranteed Amount (Proportionate) 50 Lacs 50 Lacs 75 Lacs 75 Lacs
Actual Consideration 40 Lacs 60 Lacs 50 Lacs 80 Lacs
Value of Supply 50 Lacs 60 Lacs 75 Lacs 80 Lacs
GST @ 18% 9 Lacs 10.80 Lacs 13.50 Lacs 14.40 Lacs