09 Jan 2024
A recent GST-related amendment introduces a specific valuation rule with respect to corporate guarantee transactions between related persons. This newly inserted rule runs contrary to a commonly adopted industry view that no GST is applicable to the provision of corporate guarantee between related parties. While this change seeks to provide a deeming valuation mechanism for corporate guarantee services between related persons, it also gives rise to additional complexities regarding the computation method for determining the value of such corporate guarantee services. Further, the objective of providing an overriding effect to the newly inserted rule even in cases where such services between related persons are fully creditable is unclear.
The applicability of goods and services tax (GST) on corporate guarantees has been a contentious issue since the introduction of the GST laws.
Typically, a corporate guarantee transaction involves one group company (usually, the holding company) providing a corporate guarantee on behalf of another company in the same group (usually, its subsidiary or a newly established joint venture company) for securing loans from banks and financial institutions, often without charging any consideration, or with nominal consideration. Historically, many group companies have not been discharging GST in respect of such corporate guarantees provided by them by taking a view that the corporate guarantee was issued to the bank and not to the group company benefiting from the loan, and that this was a shareholder activity rather than a service being provided to their group company. Therefore, in the past couple of years, GST authorities have been investigating and issuing notices to various group companies involved in such corporate guarantee transactions.
Another issue regarding corporate guarantee transactions has been the conflict regarding the value of corporate guarantee transactions between the related parties. Generally, the value of the supply of services between related parties is deemed to be the open market value of such services. As there is no standard value or rate that is widely accepted for corporate guarantee transactions in the market, GST authorities have raised demand notices valuing these services, with such valuations ranging from 2% of the value of the corporate guarantee provided by a group company (based on the general rate charged for bank guarantees) to the entire amount of loan availed as a result of such corporate guarantee. This has led to various disputes concerning the valuation of these corporate guarantee transactions between group companies.
To address these concerns and to bring uniformity in the valuation of such transactions, an amendment was made to Rule 28 of the Central Goods and Services Tax Rules, 2017 (CGST Rules) introducing a separate valuation mechanism in respect of corporate guarantee transactions between related persons (Valuation Amendment).
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