12 Aug 2024
The Central Board of Indirect Taxes and Customs has made significant changes to the Goods and Services Tax valuation rule for corporate guarantees provided by related parties. This update analyses the changes, the consequent clarifications, and their implications.
Effective 26 October 2023, a specific valuation rule (Rule 28(2) of the Central Goods and Services Tax Rules, 2017 (CGST Rules)) applied to corporate guarantees between related parties, which deemed the value of the service of extending corporate guarantees to be the higher of:
a. 1% of the guarantee offered, or
b. the actual consideration charged.
This valuation rule applied regardless of whether full input tax credit (ITC) was available to the recipient. The Central Board of Indirect Taxes and Customs (CBIC ), which is the central governing body for Goods and Services Tax (GST), had also reiterated that the provision of related-party corporate guarantee, even when made without any consideration, is taxable under the Central Goods and Services Tax Act, 2017
Subsequently, the CBIC notified amendments to the CGST Rules on 10 July 2024 making significant changes to Rule 28(2) with retrospective effect from 26 October 2023. It also issued a circular on 11 July 2024 (Circular) clarifying the taxability and valuation of the supply of the service of providing corporate guarantees between related persons.
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