Navigating GST on Corporate Guarantees in India: A Guide for Foreign Investors

Foreign parent companies commonly provide bank guarantees to enable their, often nascent, subsidiaries to obtain credit lines from Indian banks. The arrangement carries certain GST implications. This blog deals with  the taxability and valuation of corporate guarantees under the Indian GST rules.

Insights: GST Applicability and Key Provisions

For a foreign holding enterprise, the provision of a corporate guarantee to its Indian subsidiary is considered a taxable “supply of services.” The reason being- such a transaction comes under the definition of “supply” between “concerned persons” even if there is no consideration charged for it, as per Section 7 of the Central Goods and Services Tax (CGST) Act, 2017. And the Goods and Services (GST) on these guarantees is basically calculated depending on the value associated with the guarantee offered.

Subsequently, your enterprise’s Indian subsidiary, being the beneficiary of this service, is liable to pay GST. Note that it has to be done on a reverse charge basis (RCM). This means the GST is payable by the recipient in India, not the foreign guarantor.

GST  Circulars and Comprehending Valuation

 On 11^th July, 2024, the Central Board of Indirect Taxes and Customs (CBIC) has clarified certain valuation rules through Circular No. 225/19/2024-GST. This called for certain developments such as- on GST Council’s recommendations sub-rule (2) was inducted in Rule 28 of CGST Rules, 2017. This intent was to provide a specific clause for the valuation of the supply of services of providing a corporate guarantee to any banking company or financial institution by an entity on behalf of a related person.

The notice also highlighted that this valuation process is subject to guarantees renewed or issued on or after October 26, 2023.

Here is a gist of the key takeaways from the same-

• The value of the supply (VOS) is deemed to be 1% of the guaranteed amount, or the actual consideration, whichever is higher.
• The rate of GST pertaining to corporate guarantees offered to respective parties is 18%

For an explanatory calculation, let us imagine a foreign parent company offering a USD 1 million corporate guarantee. Also, let us put in the current exchange rate of USD 1 = INR 88.15. And thus, the calculation would go on as:

1. Guaranteed Amount in INR: $1,000,000 x 88.15 = INR 88,150,000
2. Value of Tax: 1% of INR 88,150,000 = INR 8,81,500
3. GST Payable (18%): 18% of INR 8,81,500 = INR 1,58,670

Distinction: Corporate Guarantees, LCs, and SBLCs

• The GST provisions and the valuation rule specifically apply to corporate guarantees. It is important to differentiate this from other trade financial instruments based on their function. Corporate Guarantees: The service is the guarantee itself, provided by the parent company. This is a taxable supply, and the Indian subsidiary must pay GST on an RCM basis.
• Letters of Credit (LCs): It is a financial instrument by a bank on behalf of the buyer that payment will be done to the exporter, provided that the terms and conditions laid down in the LC are satisfied, as substantiated by the presentation of all required documents. Subsequently, the GST is typically levied by the bank on its fees for issuing the LC in its jurisdiction. As this is a banking service and not the parent’s guarantee service, it is not subject to the GST liability on reverse charge basis. 
• Standby Letters of Credit (SBLCs): .  

SBLC is a secondary payment mechanism used only in case of default. Because its function is identical to a guarantee, it is likely to be treated as such for GST purposes. Therefore, an SBLC provided by a foreign parent would likely be subject to the same GST treatment as a corporate guarantee. Here, the Indian subsidiary is liable to pay GST on a deemed value of 1% of the SBLC amount under RCM.

Current Legal Challenges and Court Decisions

However, the aforesaid  CBIC circular has been challenged by several High Courts of India.  Subsequently, the courts have also granted a stay against the circular and explained that the appellate authority can decide without considering the clarifications issued by the department.

For instance, the Bombay High Court has stayed the operation of the relevant GST circular in certain cases. The citation for this case is:

Vedanta Limited vs. Union of India, Writ Petition No. 4519 of 2024

Interim orders have been given, and a final verdict from the judiciary is still awaited. Until a final judgment is delivered, the tax department may proceed with the valuation and demand based on the provisions of Rule 28(2). Disclaimer

The information furnished in this blog post is for general informational purposes only and does not hold legal, tax, or professional advice. While AMA has exercised reasonable efforts to ensure the accuracy of information/content published, AMA shall be under no liability in any manner whatsoever for incorrect information, if any. Readers should consult with a qualified professional for advice tailored to their specific circumstances.