GST AAR Rajasthan: Applicability of GST on Corporate-Guarantee

• The Applicant receives Corporate Guarantees (CG) from its foreign group companies without any consideration, in respect of loans obtained from banks and financial institutions

• There is no requirement of any periodic renewal of the CG, rather it is valid for a specified time period (i.e., from the effective date of the Deed of Guarantee till the final settlement date of the loan contract between the Applicant and the bank/financial institution)

• Whether GST under reverse charge mechanism (RCM) on issuance of CG is payable one-time or on periodical basis, considering that the CG has been issued only once and is valid for a specified time period (without requirement of any periodical renewal)

• In case GST under RCM is to be paid on periodical basis, to ascertain the value of supply:

• Whether value of loan for which guarantee is given needs to be divided equally among the relevant years of guarantee and GST is to be paid considering 1% of such divided value each year, or
• Whether GST is payable on 1% of total value of loan in first year, and on 1% of the remaining outstanding value of loan at beginning of each subsequent year

• The CG, although extended over the loan period, is provided once and continues until repayment of the loan without the need for renewal or repeated actions. Therefore, the same does not meet the criteria of “continuous supply of services” under Section 2(33) of the CGST Act, as neither there are any periodic payment obligations nor is the service being provided recurrently

• Provision of the CG is a one-time taxable event. The benefit of the guarantee is realized at the time of execution, and hence, the time of supply for GST purposes would be the date of execution of the guarantee contract. As it is not a continuous supply of service, GST liability would arise only once (i.e., at the time of executing the contract)

• Time of supply for the GST liability arising under RCM would be determined by the date of entry in the books of the Indian subsidiary or the date of payment, whichever is earlier

• Based on the same, the taxability would be as under:

• CG executed before 26 October 2023 – GST would be payable based on the valuation mechanism in Rule 28(1) of the CGST Rules at the time of execution
• CG executed after 26 October 2023 – GST payable is 1% of the deemed total value of the loan at the time of execution, with no further liabilities in subsequent years.