The Rajasthan Authority for Advance Ruling ( AAR ) in a recent matter ruled that Goods and Services Tax ( GST ) under Reverse Charge Mechanism ( RCM ) for the issuance of Corporate Guarantee is payable only once when the Guarantee is issued only once, being valid for a specified period of time.
An Application for Advance Ruling was filed by M/s Green Infra Wind Farm Assets Limited (Green Infra) seeking a ruling under Section 97(2)(a) of the Central Goods and Services Tax Act, 2017 (CGST Act) seeking determination of time and value of supply of goods or services and; determination of the liability to pay tax on any goods or services or both.
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Green Infra, an entity involved in the development and operation of renewable power projects has the capacity to generate 45 Megawatts (MW) of electricity, which is then sold to the State Electricity Board as per the Power Purchase Agreement between them.
Overseas Shareholders of the Applicant company provides corporate guarantees to banks and financial institutions in lieu of loans availed by the Applicant and does not charge any consideration from the Applicant for the same.
The Instant issue is regarding the validity of the corporate guarantee issued by the overseas shareholders. The Applicant has made it clear before the AAR that there is no requirement for periodic renewal of the Guarantee, with the same remaining in effect from date of Deed of Guarantee till the final settlement date of the loan contract between Green Infra and lender Banks/Financial Institutions.
Advocates for the Applicant, Narendra Singhvi, Shrishti Agarwal and Bhuvnesh Shah submitted that in the event that GST on the issuance of corporate guarantee is to be paid periodically, then the value of loan for which guarantee is given would have to be divided equally and GST of 1% on the divided value would have to paid through Reverse Charge Mechanism as per Rule 28(2) of CGST Rules, 2017.
The two-member Bench of the Rajasthan Authority for Advance Ruling comprising Mahipal Singh, Central Tax Member and Mahesh Kumar Gowla, State Tax Member considered the submissions on record and observed that the provision of corporate guarantee by the foreign entity is issued without exchange of any consideration the same would render such practice as ‘import of service’ received by the Applicant.
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The AAR Bench ruled that GST under RCM is required to be paid only once and not periodically considering the issuance of corporate guarantee issued for a specific period of time takes place only once and does not warrant periodic renewal under Rule 28(2) of the CGST Rules, 2017.
Furthermore, AAR referred to Notification No. 52/2023 – Central Tax issued by the Central Board Of Indirect Taxes & Customs amending Rule 28(2) of CGST Rules, 2017 to affirm that 1% of deemed total value of loan on guarantees executed after 26.10.2023 is payable as GST under Reverse Charge Mechanism on one-time basis if the contract of guarantee is executed without the payment of any consideration by the borrower.
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