New GST valuation rule for Corporate guarantees: Boon or Bane?

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Home » Articles » New GST valuation rule for Corporate guarantees: Boon or Bane?
Pragya Mishra

Pragya Mishra on Wed May 22 2024


1. Understanding Guarantee in Indian Contract Law

##1. Conceptual Overview The Indian Contract Act, 1872, defines the terms related to guarantees:

Contract of Guarantee: It's an agreement to fulfill the obligation of a third party if they default. The one providing the guarantee is the "surety," the one for whom it's provided is the "principal debtor," and the one receiving it is the "creditor." Guarantees can be oral or written.

1.1 Different Types of Guarantees

Financial Guarantee: This ensures payment to a lender if the borrower fails, thereby enhancing the borrower's creditworthiness.

Passive Association: This includes passive group association, letter of comfort, and guarantee, each serving different purposes in financial transactions.

Non-Financial Guarantee: Such as performance guarantees, which ensure the completion of a task or project.

1.2 Principles of Determining Guarantee Fees

The fee for a financial guarantee should correspond to the advantage gained by the borrower due to the guarantee. Various methods like yield approach, cost approach, etc., are used to determine this.

2. GST Application under CGST Act, 2017

2.1 Charging Provisions

GST is levied on intra-state supplies of goods or services except alcoholic liquor, based on the value determined under section 15.

2.2 Related Persons

GST is applicable even on transactions between related persons, considering them as supplies made in the course of business, as specified in Schedule I.

2.3 Active Association and its Tax Implications

Active associations like financial guarantees impacting borrowing fall under the GST purview and are taxable.

3. GST Implications on Guarantees

3.1 Personal Guarantee

Providing personal guarantees is considered a taxable service even without consideration, as per Circular No. 204/16/2023-GST. However, if no consideration is paid, the taxable value is treated as zero.

3.2 Corporate Guarantee

Post 26/10/2023, a corporate guarantee's taxable value is deemed to be one percent of the guaranteed amount or the actual consideration, whichever is higher, as per Notification No. 52/2023.

4. Addressing Issues

4.1 Determination of Taxable Value

Issues regarding the valuation of guarantees, the application of rules, and the treatment of ITC are discussed, requiring careful consideration and assessment based on individual cases.

5. Conclusion and Recommendations

Taxpayers are advised to evaluate each guarantee transaction considering past dealings, ITC availability, and potential benefits of zero-rating, to determine their tax obligations effectively.

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