The 53rd Goods and Services Tax (GST) Council meeting had raised the hopes of taxpayers for some clarity on the valuation of corporate guarantee services provided to related parties. However, the latest retrospective amendment on July 10 appears to be moving in the opposite direction.

In October last year, the government brought in a rule that the value of corporate guarantee services provided to a related recipient shall be deemed as 1 per cent of the guaranteed amount or the actual consideration, whichever is higher. This raised the worry of taxpayers, especially those without the benefit of input tax credit.

Recently, another amendment granted exemption from the rule for services that are exported or for recipients eligible for full input tax credit. It also inserted the words ‘per annum’, implying 1 per cent of guaranteed amount offered per annum.

A government circular clarifying the scope of the amendment has assumed that corporate guarantees are taxable, but does not provide any rationale for the assumption. It says tax must be paid on issuing corporate guarantee in the first year as well as on every renewal in subsequent years. Also, for the 1 per cent calculation, the sanctioned amount, rather than the disbursed loan amount, must be considered.

Lack of clarity 

The notification says the value of the corporate guarantee is 1 per cent of the guaranteed amount per annum. Thus, if a corporate guarantee is issued for five years, it would attract 1 per cent GST annually, or 5 per cent totally. This is exorbitant and will dent the working capital available for the business.

Since the rules are applied retrospectively from October 26, 2023, it remains unclear whether taxpayers would be required to pay GST based on the revised valuation and whether interest would accrue on outstanding amounts.

The amended valuation is an excessive burden on taxpayers who may have obtained the bank guarantee at a lower rate. High courts, under income tax law, have ruled that bank guarantees stand on a higher pedestal vis-a-vis the valuation of corporate guarantees.

In practical terms, the liability exposure for the guarantor does not multiply in step with the duration of the guarantee. This suggests that applying a ‘per annum’ valuation may not adequately reflect the actual risk or financial exposure associated with corporate guarantees, potentially leading to disproportionate tax burdens.

Export service 

The circular clarifies that, as per the amended rule, the mandatory valuation of 1 per cent or the agreed consideration, whichever is higher, will not apply when the recipient is located outside India. It may be noted that, under GST law, a service qualifies as ‘export’ only when certain conditions are met, including receipt of payment in foreign convertible exchange.

However, when Indian entities provide corporate guarantees to foreign entities without charging any consideration, they receive no payment. The circular says the rule would not apply to the valuation of corporate guarantees where the recipient is outside India. But then the application of another sub-rule, which talks about exports through agents, cannot be ruled out. This would result in disputes over the open market value of the guarantees. In other words, the amendment fails to address the concerns raised by exporters of corporate guarantees.

The taxability of corporate guarantees is already under challenge before different high courts, so stakeholders may approach appropriate judicial forums for relief.

(Premi is partner and Jain an associate at law firm Lakshmikumaran and Sridharan)

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Published on July 28, 2024