Corporate guarantees are essential in corporate finance, boosting a borrower’s creditworthiness and offering reassurance to lenders. As corporate guarantees grow more common in loan arrangements, understanding the Goods and Services Tax (GST) implications becomes crucial. This article covers the basics of corporate guarantees, applicable GST on corporate guarantee and HSN codes, valuation methods, and key exemptions, guiding businesses to maintain GST compliance and make informed financial choices.
Table of Contents
What is a Corporate Guarantee?
A corporate guarantee is a formal agreement between a company (the guarantor) and a lender. It ensures that the guarantor will be responsible for repaying a loan or debt if the primary borrower (the debtor) fails to do so. In simpler terms, it’s like a safety net for the lender. By pledging to cover the loan in case of non-payment, the guarantor provides lenders with an added layer of security, reducing risk. Borrowers backed by corporate guarantees often benefit from favorable loan terms, leveraging the financial strength and credibility of the guarantor.
Understanding GST Applicability on Corporate Guarantees
GST on corporate guarantees is applicable as they are categorized as a “supply of services.” GST on corporate guarantee is typically determined based on the fee or value associated with the guarantee provided.
Here are the primary aspects of GST applicability:
GST on Fee or Value-Based Charges
Corporate guarantees provided without a specific fee attract GST, calculated as 1% of the guarantee amount (deemed value). If there is a fee charged, GST is applied to the actual fee amount. For instance, if a company issues a corporate guarantee worth ₹10 lakh with a fee of ₹10,000, GST would be calculated on the ₹10,000 fee.
Exemptions for Directors
A significant exemption under GST applies to GST on corporate guarantees provided by directors securing loans on behalf of the company. This exemption is noteworthy because it encourages directors to offer guarantees for company loans without facing additional tax burdens, promoting smoother financing options for companies.
Related Read: GST on Services in India for 2024
GST Rate & HSN Code for Corporate Guarantees
The GST on corporate guarantees is 18%, with an HSN Code of 999799. GST on corporate guarantee is calculated as 1% of the guarantee amount if no fee is charged or on the actual fee when one exists. Proper use of HSN Code 999799, which classifies corporate guarantees under business support services, is crucial for accurate tax filing, avoiding penalties, and simplifying reporting.
Related Read: GST Rates in India 2024
How to Determine the Value of Corporate Guarantee for Related Parties
For related-party transactions, determining the value of a corporate guarantee can be complex.
Here are the three main methods used:
1. Deemed Value of Corporate Guarantee as per Rule 28(2)
Under Rule 28(2) of the CGST Rules, if no fee is charged, the deemed value of a corporate guarantee is calculated as 1% per annum of the guarantee amount. This method applies when both the guarantor and the recipient are located within India, and the recipient is not eligible for full input tax credit (ITC).
Example: If a parent company provides a corporate guarantee for its subsidiary worth ₹20 lakh without charging a fee, GST on corporate guarantee would be calculated on ₹20,000 (1% of ₹20 lakh).
2. Declared Value of Corporate Guarantee as per Invoice
Following a recent amendment in July, the declared invoice value can now take precedence over the deemed value for GST on corporate guarantee purposes. This change, effective for guarantees issued or renewed after October 26, 2023, is significant for entities eligible for full ITC, allowing them to claim the actual fee as the basis for GST calculation.
Who Can Claim Full ITC on Corporate Guarantees?
Under Section 16 of the CGST Act, companies eligible for “full ITC” (Input Tax Credit on all inputs) can use the invoice value, instead of a deemed value, to calculate GST on a corporate guarantee. However, “full ITC” eligibility requires unrestricted ITC, which can vary in interpretation across rulings.
Banks, financial institutions, and entities providing exempt supplies, which only qualify for 50% ITC under Section 17(4), do not meet the criteria for full ITC. These entities must therefore calculate GST on corporate guarantees based on a deemed value (usually 1% per annum) rather than the invoice amount.
3. Value of Corporate Guarantee Determined by Tax Officers Under Rule 28(1)
When neither the deemed nor declared value applies effectively, Rule 28(1) empowers tax officers to determine the value. This provision acts as a fallback, allowing tax authorities to assign a fair and reasonable value to the corporate guarantee when standard valuation approaches are insufficient.
The Difference Between Personal, Bank, and Corporate Guarantees
To clarify the distinctions between types of guarantees, here’s a quick comparison:
Guarantee Type |
Purpose |
Application Process |
Financial Obligations |
Corporate | Secures loans between companies | Often involves legal and contractual steps | Non-cash, entity-backed |
Personal | Individual backing for a loan | A simpler process, usually personal relationships | Full personal liability |
Bank | Bank-guaranteed loan security | Involves specific financial institution protocols | The bank assumes the financial liability |
Corporate guarantees are primarily used between entities to secure loans and provide credibility, while personal guarantees and bank guarantees often involve individual or institutional backing, with differing levels of liability.
Corporate Guarantee Exemptions
There are several exemptions for GST on corporate guarantees in specific cases, primarily when directors or promoters provide them under particular conditions. These exemptions help promote efficient corporate financing by reducing GST burdens.
Exemption Cases Include:
1. Guarantees provided by directors on behalf of the company.
2. Promoters securing loans for their startups or subsidiaries.
Understanding these exemptions helps businesses minimize their GST liabilities, making the financing process smoother.
Read Read: List of Goods and Services Exempt Under GST
Conclusion
Navigating the implications of GST on corporate guarantees is essential for businesses to avoid unexpected costs and ensure compliance. From understanding the GST rate, HSN code, and valuation methods to identifying key exemptions, companies have a lot to consider when managing corporate guarantees. By staying informed about GST rules and choosing the right valuation approach, businesses can strategically plan their finances and reinforce their loan security.
Frequently Asked Questions (FAQs)
1. Is corporate guarantee taxable under GST?
Yes, corporate guarantees qualify as a supply of services under GST, making them taxable at 18%.
2. What is the SAC of corporate guarantee?
The SAC, or Service Accounting Code, for corporate guarantees is 99715.
3. Is corporate guarantee a related party transaction?
Corporate guarantees between related entities, such as a parent and subsidiary, are considered related-party transactions, and special valuation methods may apply.
4. What is the GST Council’s decision on corporate guarantee?
The GST Council has maintained that corporate guarantees fall under taxable services, and the standard 18% GST on corporate guarantees applies on either the actual fee or the 1% of the guarantee amount.
5. What is Rule 28 of CGST Rules in relation to corporate guarantees?
Rule 28 of the CGST Rules deals with the valuation of supplies between distinct or related persons. It provides methods for determining the taxable value of such supplies, including situations where corporate guarantees are involved.