Dear All,

The Central Board of Indirect Taxes and Customs (‘the CBIC’) issued Notification No. 12/2024-Central Tax on 10 July 2024 (‘the Notification’) and Circular No. 225/19/2024-GST has also been issued on 11 July 2024 (‘the Circular’) implementing certain changes relating to taxability and valuation of Corporate Guarantee (‘CG’) services. The key aspects of the Notification and the Circular are summarized below:Changes as per the NotificationNotification

Changes

Notification No. 12/2024-Central Tax

(Amendment in the CGST Rules,2017)

• Amendment in Rule 28(2) w.e.f. 26 October 2023 as under:
  • Sub-rule shall be applicable where CG services are provided only to recipient located in India
  • Value of CG shall be 1% of guarantee offered per annum i.e., 1% of value of guarantee offered multiplied by number of years for which guarantee is offered

• Where recipient is eligible for full input tax credit (‘ITC’), value declared in invoice shall deemed to be the transaction value

 Aspects clarified in the Circular

Issue

Clarification

Whether new Rule 28(2) introduced w.e.f. 26 October 2023 providing valuation @ 1% of guarantee will apply on CG issued before 26 October 2023

• Supply of services of providing CG to any bank or financial institution by a supplier to a related recipient was taxable even before 26 October 2023 and new rule is only for determination of the value
• Valuation of services of providing CG shall be as following:

• • If issued before 26 October 2023 : As per Rule 28 existing during that time
  • If issued on or after 26 October 2023 : As per new Rule 28(2)

What will be the value of CG in case loan is party availed or not availed at all by the recipient

• Activity of supply of CG service is not linked with the actual disbursal of loan
• Therefore, value of supply will be calculated based on amount of CG offered irrespective of the amount of loan disbursed to the recipient
• The recipient would be eligible to claim ITC irrespective of when and the amount of loan disbursed

What will be the valuation in case CG is provided by more than one entity/ Co-guarantor

• If the total consideration received by the co-guarantors is more than 1% of the value of CG, value will be the consideration received
• Where total consideration received by the co-guarantors is less than 1% of the value of CG, value will be 1% of the CG and GST shall be payable by each co-guarantors proportionately on 1% of the amount guaranteed by each

Whether GST liability on 1% of CG is to be done one time or on yearly basis

• According to the new rule, value of supply of CG services shall be 1% of the amount of CG per annum or actual consideration, whichever is higher
• Therefore, value shall be 1% of the amount of CG multiplied by the number of years for which such guarantee offered
• Where CG is offered for less than one year, valuation may be done on a proportionate basis

Whether benefit of second proviso to Rule 28(1) which

states that value declared in

invoice is deemed to be the open market value in cases where full ITC is available to the recipient of services, is not applicable in cases falling under Rule 28(2)

• Similar proviso has been inserted in Rule 28(2) w.e.f. 26 October 2023 providing that where recipient is eligible for full ITC, value of CG as declared in the invoice shall deemed to be the value of services
• Accordingly, in cases where recipient is eligible for full ITC, value declared in invoice shall deemed to be the value of services

• • As per second proviso to sub-rule (1) where CG is provided before 26 October 2023
  • As per proviso to sub-rule (2) where CG is provided on or after 26 October 2023