GST Liability on Corporate Guarantee:
One-Time Payment under Reverse Charge Mechanism
By Yogesh Verma (CS/LLB) / 2 min read / GST Advance Ruling
Applicant:
M/s Green Infra Wind Farm Assets Limited
Authority: Rajasthan Authority for Advance Ruling (Goods and Services
Tax)
Ruling No.: RAJ/AAR/2024-25/10
Date of Ruling: June 18, 2024
1. Facts of the Case:
M/s Green Infra Wind Farm
Assets Limited is engaged in the business of renewable power projects and
operates a 45 MW wind energy plant in Rajasthan. They sell the electricity
generated to the State Electricity Board under a Power Purchase Agreement (PPA).
As part of their
business, the applicant’s foreign group companies provide corporate guarantees
to banks and financial institutions for loans taken by the applicant. These
guarantees are provided without any consideration (no charge). The applicant
sought an advance ruling to clarify the GST implications for such corporate
guarantees provided by related parties and whether GST should be paid as a
one-time payment or periodically under the reverse charge mechanism.
2. Questions Raised by
the Applicant:
1. Is
GST under the reverse charge mechanism for corporate guarantees payable
one-time or on a periodic basis, given that the
guarantee is issued once and remains valid for a specified period without the
need for periodic renewal?
2. If
GST is payable periodically, how should the value of the
corporate guarantee be determined:
o Should
the loan value be divided equally among the relevant years, with GST payable on
1% of this divided value each year?
o Or
should GST be payable on 1% of the total loan value in the first year, and 1%
of the remaining outstanding loan amount in each subsequent year?
3. Relevant
Sections/Rules:
- Section 2(33) of the CGST Act, 2017:
Defines "continuous supply of services."
- Rule 28(2) of the CGST Rules, 2017:
Deals with the valuation of services between related parties, including
corporate guarantees, where the value is deemed to be 1% of the guaranteed
amount or the actual consideration, whichever is higher.
- Section 13(3) of the CGST Act, 2017:
Specifies the time of supply for services under reverse charge, which is
either the date of payment or the date of entry in the recipient’s books
of account.
4. Submission by the
Applicant:
- The applicant argued that the
corporate guarantee provided by the foreign group companies should be
treated as a one-time guarantee and not as a continuous supply of
service.
- They further argued that GST
should be paid only once, at the time the corporate guarantee is
issued.
- If GST is to be paid periodically,
they requested clarification on whether the loan value should be divided
equally among the relevant years, or if GST should be paid based on 1% of
the remaining outstanding loan value each year.
5. Comments from the
Jurisdictional Officer:
The jurisdictional
officer agreed that the corporate guarantee constitutes a taxable supply
under GST law, even without consideration, as it involves related parties. They
confirmed that GST should be payable on a one-time basis under the
reverse charge mechanism when the corporate guarantee is issued, and it should
not be treated as a continuous supply of service.
6. Findings by the
Authority:
After reviewing the facts
and submissions, the Authority made the following observations:
1. Corporate
Guarantee as Import of Service:
Since the corporate guarantee is provided by foreign group companies, it
constitutes an import of services for the applicant under GST law. Under
the reverse charge mechanism, the applicant (recipient) is liable to pay GST.
2. Time
of Supply:
Under Section 13(3) of the CGST Act, the time of supply for services
under reverse charge is the date of entry in the recipient’s books of account.
As the guarantee was provided without consideration, GST must be paid when the
guarantee is recorded in the applicant’s books.
3. Is
the Corporate Guarantee a Continuous Supply of Service?:
The Authority ruled that the corporate guarantee is not a continuous supply
of service. Since it is issued once, with no need for renewal or periodic
payment, it cannot be classified as a continuous supply. GST is therefore
payable one-time at the time of issuance.
4. GST
Calculation:
GST is payable at 1% of the total guaranteed amount, as per Rule
28(2) of the CGST Rules. The applicant is required to pay GST under reverse
charge when the guarantee is issued, and no further periodic payments are
required.
7. Ruling:
1. GST
under reverse charge is payable one-time for the corporate
guarantee, as it is issued once and valid for a specific period without
periodic renewal. No periodic GST payments are required, in accordance with Rule
28(2) of the CGST Rules.
2. Since
GST is payable one-time, the question of dividing the loan value for periodic
payments does not arise. GST is payable on 1% of the total loan value
when the corporate guarantee is issued.
8. Conclusion:
The Rajasthan Authority
for Advance Ruling has clarified that the applicant is required to pay GST once
under the reverse charge mechanism for the corporate guarantee provided by the
foreign group companies. The GST amount will be based on 1% of the total
guaranteed loan amount, as per Rule 28(2) of the CGST Rules. The
corporate guarantee is not a continuous supply of service, and no periodic GST
payments are necessary.
This ruling provides
clarity on the treatment of corporate guarantees provided by related foreign
entities and confirms that such guarantees are treated as import of services
for GST purposes, with GST payable one-time under reverse charge.
Disclaimer: All the Information is based on the notification, circular and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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