{"id":139,"date":"2025-09-08T07:09:32","date_gmt":"2025-09-08T07:09:32","guid":{"rendered":"https:\/\/www.enmglobal.com\/blog\/?p=139"},"modified":"2025-09-08T07:21:49","modified_gmt":"2025-09-08T07:21:49","slug":"navigating-gst-on-corporate-guarantees-in-india-a-guide-for-foreign-investors","status":"publish","type":"post","link":"https:\/\/www.enmglobal.com\/blog\/navigating-gst-on-corporate-guarantees-in-india-a-guide-for-foreign-investors\/","title":{"rendered":"Navigating GST on Corporate Guarantees in India: A Guide for Foreign Investors"},"content":{"rendered":"\n

Foreign parent companies commonly\u00a0provide bank guarantees to enable their,\u00a0often nascent,\u00a0subsidiaries to obtain credit lines from Indian banks. The arrangement carries certain GST implications.\u00a0This blog deals with \u00a0the taxability and valuation of corporate guarantees under the Indian GST rules.<\/p>\n\n\n\n

Insights: GST Applicability and Key Provisions<\/strong><\/strong><\/p>\n\n\n\n

For a foreign holding enterprise, the provision of a corporate guarantee to its Indian subsidiary is considered a taxable \u201csupply of services.\u201d\u00a0The reason being- such a transaction comes under the definition of \u201csupply\u201d between \u201cconcerned persons\u201d 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.<\/p>\n\n\n\n

Subsequently, your enterprise\u2019s 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.<\/p>\n\n\n\n

GST <\/strong>\u00a0Circulars and Comprehending Valuation<\/strong><\/strong><\/p>\n\n\n\n

\u00a0On 11^{th<\/sup>\u00a0July, 2024, the Central Board of Indirect Taxes and Customs (CBIC) has clarified certain valuation rules through Circular No. 225\/19\/2024-GST. <\/strong>This called for certain developments such as- on GST Council\u2019s 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.<\/p>\n\n\n\n}

The notice also highlighted that this valuation process is subject to guarantees renewed or issued on or after October 26, 2023.<\/p>\n\n\n\n

Here is a gist of the key takeaways from the same-<\/p>\n\n\n\n

\n
The value of the supply (VOS) is deemed to be 1% of the guaranteed amount, or the actual consideration, whichever is higher.<\/li>\n\n\n\n
The rate of GST pertaining to corporate guarantees offered to respective parties is 18%<\/li>\n<\/ul>\n\n\n\n
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:<\/p>\n\n\n\n
\n
Guaranteed Amount in INR:<\/strong>\u00a0$1,000,000 x 88.15 = INR 88,150,000<\/li>\n\n\n\n
Value of Tax:<\/strong>\u00a01% of INR 88,150,000 = INR 8,81,500<\/li>\n\n\n\n
GST Payable (18%):<\/strong>\u00a018% of INR 8,81,500 = INR 1,58,670<\/li>\n<\/ol>\n\n\n\n
Distinction: Corporate Guarantees, LCs, and SBLCs<\/strong><\/strong><\/p>\n\n\n\n
\n
The GST provisions and the valuation rule specifically apply to corporate guarantees. It is important to differentiate this from other trade financial\u00a0instruments based on their function. Corporate Guarantees:<\/strong>\u00a0The 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.<\/li>\n\n\n\n
Letters of Credit (LCs):<\/strong>\u00a0It is\u00a0a 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\u2019s guarantee service, it is not subject to the GST liability on reverse charge basis.\u00a0<\/li>\n\n\n\n
Standby Letters of Credit (SBLCs):<\/strong>\u00a0. \u00a0<\/li>\n<\/ul>\n\n\n\n
SBLC\u00a0is 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.<\/p>\n\n\n\n
Current Legal Challenges and Court Decisions<\/strong><\/strong><\/p>\n\n\n\n
However, the aforesaid \u00a0CBIC circular has been challenged by several High Courts of India. \u00a0Subsequently, 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.<\/p>\n\n\n\n
For instance, the Bombay High Court has stayed the operation of the relevant GST circular in certain cases. The citation for this case is:<\/p>\n\n\n\n
Vedanta Limited vs. Union of India, Writ Petition No. 4519 of 2024<\/em><\/p>\n\n\n\n
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<\/strong><\/strong><\/p>\n\n\n\n
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.<\/p>\n\n\n\n
<\/p>\n<\/body>","protected":false},"excerpt":{"rendered":"
Foreign parent companies commonly\u00a0provide bank guarantees to enable their,\u00a0often nascent,\u00a0subsidiaries to obtain credit lines from Indian banks. The arrangement carries certain GST implications.\u00a0This blog deals with \u00a0the taxability and valuation of corporate guarantees under...<\/p>\n","protected":false},"author":1,"featured_media":140,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[3,15],"tags":[50,5,18,17],"class_list":["post-139","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business-in-india","category-gst","tag-business-in-india","tag-business-registration-services","tag-enm-global","tag-gst-consultants"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/www.enmglobal.com\/blog\/wp-content\/uploads\/2025\/09\/Blue-Black-Modern-Tips-Build-Business-Blog-Banner.png?fit=2240%2C1260&ssl=1","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/www.enmglobal.com\/blog\/wp-json\/wp\/v2\/posts\/139","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.enmglobal.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.enmglobal.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.enmglobal.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.enmglobal.com\/blog\/wp-json\/wp\/v2\/comments?post=139"}],"version-history":[{"count":1,"href":"https:\/\/www.enmglobal.com\/blog\/wp-json\/wp\/v2\/posts\/139\/revisions"}],"predecessor-version":[{"id":141,"href":"https:\/\/www.enmglobal.com\/blog\/wp-json\/wp\/v2\/posts\/139\/revisions\/141"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.enmglobal.com\/blog\/wp-json\/wp\/v2\/media\/140"}],"wp:attachment":[{"href":"https:\/\/www.enmglobal.com\/blog\/wp-json\/wp\/v2\/media?parent=139"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.enmglobal.com\/blog\/wp-json\/wp\/v2\/categories?post=139"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.enmglobal.com\/blog\/wp-json\/wp\/v2\/tags?post=139"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}