GST: Submission requesting for clarification on valuation of corporate guarantees between related parties under Rule 28(2) of CGST Rules

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GST: Submission requesting for clarification on valuation of corporate guarantees between related parties under Rule 28(2) of CGST Rules

Tejasvi

@tejasvi

December 19, 2023

Public Policy

As you may be aware, the Central Board of Indirect Taxes and Customs (CBIC), vide issue of Notification No. 52/2023 – Central Tax dated 02 October 2023 (Notification) amended Rule 28 of Central Goods and Services Tax Rules, 2017 (CGST Rules). A new sub-rule (2) under Rule 28 of CGST Rules was inserted w.e.f. October 26, 2023 to provide that the taxable value of supply of corporate guarantee between related parties to any banking company or financial institution would be higher of: i) 1% of the amount of such guarantee offered; or ii) actual consideration. Further, Circular No. 204/16/2023-GST dated 27 October 2023 was issued clarifying certain issues pertaining to the taxability of personal guarantee and corporate guarantee under GST.

We have made a representation to GST policy wing requesting for clarifications on the following aspects:

Corporate guarantees provided before issuance of above Notification/ Circular are not covered within the scope of said notification/ circular

The Notification inserting sub-rule (2) under Rule 28 of CGST Rules states that the amendment will come into force on the date of its publication in the Official Gazette (i.e., with effect from 26 October 2023). There is lack of clarity on the treatment of corporate guarantees extended before issuance of the above notification. We have requested the government to clarify issue a Circular to clarify that deemed valuation of 1% as inserted in Rule 28(2) of CGST Rules will apply prospectively (i.e., with effect from 26 October 2023).

Valuation in cases where the guaranteed amount is more than the amount utilised by the beneficiary

In such cases, the overall guaranteed amount has no relevance for valuation of the deemed supply where the actual utilised amount is lesser than the said amount. We have requested the government to clarify that the valuation mechanism would apply only to the actual facility utilised by the beneficiary company, and not to the entire guaranteed amount.

Receipt/ payment of corporate guarantee over multiple years

We have requested the government to provide clarity as to whether GST has to be discharged one-time, or each periodic payment received/paid or when the supply is complete at the time of extending/offering guarantee. This will provide certainty to the industry

Clarification on whether Rule 28(2) of CGST Rules will apply on letter of credit

The term ‘guarantee’ and ‘corporate guarantee’ are not defined under GST Law. In essence, corporate guarantee involves a corporate entity guaranteeing the performance of another corporate entity under any contract or discharge of the liability of the said corporate entity in case of any default. The imperative purpose of a letter of credit is trust building and enabling smooth transactions between the buyer and the seller. Taxing the same under GST might create a hindrance to the very purpose of it. Hence, we have requested government to clarify that letter of credit will not be considered as corporate guarantee and be outside the scope of taxation.

Treatment/ tax position in respect of guarantee to a group company outside India, where amount received is lower that consideration agreement on account of transfer pricing adjustments

There can be situations where valuation of guarantee according to transfer pricing margin for such transactions is agreed at a value less than 1% of the guarantee offered (say 0.9%). In such a case, the value of corporate guarantee will be deemed to be 1% under GST. However, Indian entity will not receive the differential fee (i.e., 0.1%) from its overseas group company. This will result in a discrepancy in the treatment of the guarantee wherein 0.9% value of corporate guarantee will be considered as export of services and the balance 0.1% will not be considered as export. As a result, Indian company will be liable to pay tax on such differential amount, which is not the intent of this provision. Hence, we have requested government to clarify that in case of transfer pricing adjustments, differential fees (where there is a true-down) with respect to provision of guarantee to a group company outside India should also classify as export of services.

These clarifications will provide certainty to the industry

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Tejasvi

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