The Central Board of Indirect Taxes and Customs ( CBIC ) has issued a circular to clarify the taxability and valuation of corporate guarantees provided between related persons under the Goods and Services Tax ( GST ) regime.
Taxability: Supplying a corporate guarantee to a bank or financial institution on behalf of a related recipient is taxable even before October 26, 2023.
Valuation:
Before October 26, 2023: As per existing Rule 28 of the Central GST Rules ( CGST Rules ).
On or after October 26, 2023: 1% of the guaranteed amount per year or the actual consideration paid by the recipient, whichever is higher.
If the guarantee period is less than a year, the valuation is proportionate (e.g., 0.5% for a 6-month guarantee).
Renewals:
Tax is payable on renewal at the same rate as the initial issuance.
Input Tax Credit ( ITC ):
The recipient can claim ITC irrespective of the loan amount disbursed.
Takeover of Loans – If a new guarantee is not issued, GST will no’t be levied again.
Multiple Guarantors:
If the total consideration paid to all guarantors is more than 1% of the guaranteed amount, tax is payable on the actual consideration.
If the consideration is less than 1%, each guarantor pays tax proportionally on 1% of their guaranteed share.
Payment of Tax:
Domestic guarantors: Pay under forward charge mechanism (invoice issued by guarantor).
Foreign guarantors: Recipient pays under reverse charge mechanism.
Invoice Valuation:
The declared invoice value is considered the supply value if the recipient gets full ITC.
Exports:The valuation rule (1% per year) doesn’t apply to guarantees provided to related persons outside India.
Trade notices will be issued to publicise this circular, the CBIC circular added while stating that Clarifications for implementation issues can be requested from the Board.
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