Rajasthan’s Authority for Advance Ruling (RAAR) has recently issued a crucial ruling regarding the applicability of Goods and Services Tax (GST) on corporate guarantees provided by overseas group entities. According to the ruling, the GST is payable only once at the time of issuing the guarantee, rather than periodically throughout the duration of the guarantee. This clarification aligns with recent government circulars, though it also presents some practical challenges to the industry.
One-Time GST Payment Under RCM
Under the reverse charge mechanism (RCM), GST must be paid at the time of issuing the corporate guarantee, rather than on a recurring basis. The RAAR highlighted that since the guarantee is valid for a specific period of time without the requirement of renewal until the final settlement of the loan, there is no need for periodic GST payments. This ruling relies on Section 13(3) of the GST Act, which is key in determining the time of supply in such scenarios.
In cases where no consideration is charged by the overseas entity for providing the corporate guarantee, RAAR clarified that the time of supply would be the date of entry into the service recipient’s (i.e., the Indian subsidiary’s) books of accounts. This means that the GST liability is discharged on a one-time basis at the time of supply, eliminating the need for ongoing payments.
Industry Challenges: Full Upfront Payment of GST
While this ruling simplifies the timeline for GST liability, industry experts note significant challenges. According to Harpreet Singh, a Partner specializing in Indirect Taxes at Deloitte, the biggest hurdle lies in the need to pay the full GST upfront for the entire period of the guarantee. For instance, if a corporate guarantee is valid for five years, the tax is calculated upfront at 5%, with 1% attributable to each year.
This situation can become particularly complex if a corporate guarantee is withdrawn during its validity period. If, for example, the guarantee is rescinded after two years, the upfront tax paid for the remaining three years becomes an issue for businesses.
Latest Updates from the GST Council
The GST Council recently updated the regulations around corporate guarantees. On October 7, 2023, it was decided that an 18% GST rate would be applicable on corporate guarantees provided by a parent company to its subsidiary for a bank loan. A subsequent notification by the Central Board of Indirect Taxes and Customs (CBIC) stated that the value of supply for corporate guarantees given by a related party would be either 1% of the total guarantee amount or the actual consideration, whichever is higher.
For example, if a corporate guarantee is worth ₹100 crore, the GST liability would amount to ₹18 lakh. The notification also confirmed that these changes would be applied prospectively, meaning they would not affect transactions completed before October 26, 2023, effectively mitigating retrospective tax risks.
Personal Guarantees by Directors: No GST Imposed
Another significant point clarified by the GST Council pertains to personal guarantees given by directors. If no consideration is paid—directly or indirectly—for a personal guarantee offered by a director for a loan to their company, the open market value of the transaction may be treated as zero. Thus, there will be no GST liability in such cases. This measure aims to remove the burden of GST on directors who personally guarantee loans for their companies without remuneration.
Conclusion
The RAAR’s ruling on GST for corporate guarantees highlights the complexity of tax laws governing cross-border transactions within group companies. Though it simplifies the frequency of tax payments by requiring GST only once, the industry must now deal with the challenge of making full upfront payments. With the recent changes, both corporate guarantees and personal guarantees are being redefined within the GST framework, with implications for both businesses and individuals.
Key Takeaways
- GST on overseas corporate guarantees is to be paid one-time under RCM, not periodically.
- Full upfront GST payment for the entire period of the corporate guarantee can be a challenge if the guarantee is withdrawn early.
- Personal guarantees provided by directors without remuneration are exempt from GST.
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