Question And Answer
Subject: GST Applicability on corporate Guarantee
Querist: Vaibhav Aggarwal
Answered by:
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Date: July 8, 2023
Query asked by Vaibhav Aggarwal

what will be the GST amount Chargeable on the amount of Corporate Guarantee in case of newly opened Subsidiary Company?

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Answer given by

The issue whether providing Corporate Guarantee by one company to other Group Company attracts GST, is debatable issue. The Group concerns will normally fall in definition of related parties and therefore even without consideration there may be taxable supply as per entry 2 in Schedule I to CGST Act. The said entry reads as under:
[See section 7]
2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.”
The moot question will be whether the transaction of providing Corporate Guarantee is within scope of business. Normally for Corporates (generally not in Finance business) giving Corporate Guarantee cannot be business.
Accordingly the transaction should not be within course of business. There is also alternative argument that it is actionable claim as the bank to whom Corporate Guarantee is given can pursue its recovery from guarantor in court of law.
Therefore in my view the Corporate Guarantee cannot be liable under GST.
If at all considered liable to GST then valuation is one more issue. The Rule 28 provides for valuation when parties are related parties. Rules 30 and 31 also provide for valuation. The corporate guarantee being party specific open market method may not be feasible. Here comparison can be made with financial institutions and banks charging their clients for giving guarantees. Still situational difference will remain as banks have varying methods under different schemes. However, if subsidiary company is eligible to get full ITC then any valuation will be permissible. If full ITC not eligible then valuation can be under Rule 28,30 or 31 i. e. reasonable value.

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