The Authority for Advance Rulings, Rajasthan in the case of M/S. GREEN INFRA WIND FARM ASSETS LIMITED. vide Order No. RAJ/AAR/2024-25/10 dated 28.06.2024, has ruled that the GST liability on corporate guarantees provided without consideration is triggered once at the time of execution, with the value of the supply being determined by the applicable rules depending on whether the contract was executed before or after 26.10.2023.

Facts of the Case:  The applicant receives corporate guarantees from its foreign group companies for loans obtained from banks and financial institutions The foreign group companies do not charge any consideration for providing these guarantees. The applicant queries whether GST under RCM is applicable on these guarantees when no consideration is paid

Issue:

• If GST under RCM is applicable, the applicant seeks clarity on whether the GST is to be paid once at the time of providing the guarantee or periodically for each year during which the guarantee remains in force.
• In case of periodic payments, the applicant seeks clarification on whether the value of the guarantee (1% as per Rule 28(2) of the CGST Rules) should be divided equally across the period of the guarantee or calculated based on 1% of the total guaranteed value each year.
• Also, to determine if GST should be paid based on 1% of the original loan amount in the first year and, in subsequent years, based on the outstanding loan amount at the beginning of each year.

Submission by the Applicant:

• The corporate guarantee provided by the foreign group companies for the loan obtained by the applicant from a bank/financial institution is a one-time guarantee and not a continuous supply of service under Section 2(33) of the CGST Act. The guarantee, 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, maintains that the corporate guarantee does not meet the definition of “continuous supply of services” under Section 2(33) of the CGST Act, as there are no periodic payment obligations nor is the service being provided recurrently.
• Various case laws, including Bajaj Allianz General Insurance Company Ltd. v. CCE and Modi-Mundipharma Pvt. Ltd. v. CCE, are cited to emphasize that guarantees or insurance policies provided once but with continuing obligations are not considered continuous supplies.
• The “value of supply” for corporate guarantees should be 1% of the guaranteed amount as per Rule 28(2) of the CGST Rules. GST should be payable once, at the time of execution of the guarantee, and not periodically. If periodic payments are required, the value of the loan should be divided equally over the years of the guarantee, with GST paid on 1% of the divided value annually.

Submission by the Department:  

• The department clarified that the provision of a corporate guarantee 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. The service provided (guarantee) is not a continuous supply of service, and GST liability would arise only once, at the time of executing the contract.
• The department reiterated that GST liability is payable on a one-time basis at the time of executing the contract. For guarantees executed after 26-10-2023, as per Rule 28(2), the GST payable is 1% of the deemed total value of the loan at the time of execution, with no further liabilities in subsequent years. The two proposed alternatives for periodical payments (dividing the loan value or paying based on the outstanding value each year) do not apply.
• When the guarantee is issued by a foreign holding company for the benefit of an Indian subsidiary, the transaction qualifies as an “import of services.” GST would be payable under the reverse charge mechanism, and the time of supply would be determined by the date of entry in the books of the Indian subsidiary or the date of payment, whichever is earlier.

AAR Observations and Rulings: 

A. GST under reverse charge mechanism payable one-time or periodically for corporate guarantees issued

GST under RCM is payable one-time, not on a periodic basis. The issuance of the corporate guarantee is a singular event, and since it is valid for a specified period without requiring renewal, GST liability arises only once, at the time of the issuance of the guarantee.

B. GST under RCM is to be paid periodically, how is the value of supply determined

Since the ruling determined that GST is to be paid only once. However, regarding the value of supply, the ruling clarifies

• Before 26.10.2023: If the corporate guarantee was executed without consideration for a related party, GST would be payable based on the valuation mechanisms in Rule 28(1) of the CGST Rules at the time of execution.
• After 26.10.2023: GST under RCM is payable at 1% of the deemed total loan value at the time of the guarantee’s execution, for guarantees provided to a related party without consideration, based on Rule 28(2).