The Government of West Bengal on September 11th 2024 issued a notification clarifying various issues related to the taxability and valuation of corporate guarantees provided between related entities.
1. Applicability of Sub-rule (2) of Rule 28
Background: On 26th October 2023, sub-rule (2) was added to Rule 28 of the West Bengal Goods and Services Tax Rules, 2017 (WBGST Rules), which deals with the valuation of services related to corporate guarantees. This amendment was aimed at refining how GST is calculated for such guarantees.
Clarification: The newly inserted sub-rule (2) only affects the valuation of corporate guarantees issued on or after 26th October 2023. For guarantees issued before this date, the valuation should follow the rules that were in place before the amendment. This means that while the GST on corporate guarantees has been taxable since before the amendment, the way we determine the value of such guarantees for GST purposes has changed only from the specified date.
2. Valuation of Corporate Guarantees
Scenario: When a corporate guarantee is provided, it is typically based on the total amount guaranteed, regardless of whether the actual loan amount disbursed is partial or none.
Clarification: GST on corporate guarantees should be calculated based on the total guaranteed amount, not the disbursed loan amount. This ensures that businesses are taxed on the full extent of their guarantee obligations. Furthermore, businesses can claim Input Tax Credit (ITC) on this GST even if the loan is not disbursed immediately.
3. Takeover of Existing Loans
Scenario: If a loan, for which a corporate guarantee was previously issued, is taken over by another bank or financial institution, what are the GST implications?
Clarification: Simply transferring a loan to another lender does not trigger additional GST obligations. GST is applicable only if a new corporate guarantee is issued or if an existing guarantee is renewed. This ensures that businesses are not burdened with duplicate GST charges due to administrative changes in loan management.
4. Corporate Guarantees by Multiple Co-Guarantors
Scenario: In cases where multiple entities provide a corporate guarantee, how should GST be apportioned?
Clarification: GST should be calculated based on each co-guarantor’s share of the guarantee. If two entities, A and B, jointly guarantee ₹1 crore, GST is assessed on each entity’s portion of the guarantee. If A guarantees 60% and B guarantees 40%, GST is calculated as 1% of ₹60 lakh for A and 1% of ₹40 lakh for B. This proportional approach ensures fair tax treatment for all co-guarantors based on their individual guarantee contributions.
5. Reverse Charge Mechanism for Foreign Guarantees
Scenario: How is GST handled for corporate guarantees issued by foreign entities?
Clarification: For domestic corporate guarantees, GST is paid under a forward charge mechanism, meaning the guarantor issues an invoice and collects GST. However, for guarantees issued by foreign entities to related parties in India, GST is paid under a reverse charge mechanism by the recipient of the service in India. This ensures compliance while dealing with international transactions.
6. Frequency of Tax Payment
Scenario: If a corporate guarantee is issued for a fixed term, how often should GST be paid?
Clarification: The value of a corporate guarantee is assessed annually at 1% of the guaranteed amount or the actual consideration, whichever is higher. For guarantees spanning multiple years, GST is calculated on a yearly basis and paid accordingly. For instance, a five-year guarantee requires GST on 5% of the guaranteed amount. For guarantees less than a year, GST is prorated accordingly. This approach ensures that the tax burden matches the duration of the guarantee.
7. Proviso to Sub-rule (1) of Rule 28
Scenario: How does the second proviso to sub-rule (1) affect the valuation of corporate guarantees under sub-rule (2)?
Clarification: The second proviso allows the value declared in the invoice to be considered the open market value if the recipient is entitled to full ITC. This proviso applies equally to corporate guarantees, ensuring that businesses can rely on the invoiced amount for GST purposes if full ITC is available.
8. Export of Corporate Guarantees
Scenario: Are there special rules for exporting corporate guarantees?
Clarification: The valuation rules under sub-rule (2) do not apply to corporate guarantees exported outside India. This means that when a corporate guarantee is provided to entities outside India, the valuation for GST purposes follows the general export provisions rather than the specific sub-rule (2) requirements.
The recent clarifications issued by the Directorate of Commercial Taxes aim to streamline the GST process for corporate guarantees. By understanding these details, businesses can ensure compliance and avoid potential issues related to tax calculations and payments.
