Key Highlights of Circular No. 225/19/2024-GST

2025-03-04 06:30:59 02March

02March

Key Highlights of Circular No. 225/19/2024-GST

<p>The <strong>Government of India</strong>, through <strong>Circular No. 225/19/2024-GST</strong>, issued on <strong>July 11, 2024</strong>, clarifies <strong>taxability and valuation of corporate guarantee services between related parties</strong> under <strong>Rule 28(2) of the CGST Rules, 2017</strong>. This circular resolves multiple industry concerns regarding <strong>GST applicability, valuation, and ITC claims</strong>.</p><hr><h3><strong>1. Background of the Issue</strong></h3><ul><li><strong>Corporate guarantees provided by companies to related entities</strong> (e.g., parent companies backing loans for subsidiaries) are considered <strong>taxable supplies under GST</strong>.</li><li><strong>Rule 28(2) of CGST Rules</strong>, introduced on <strong>October 26, 2023</strong>, sets the <strong>valuation rule</strong> at <strong>1% of the guarantee amount or actual consideration, whichever is higher</strong>.</li><li>The circular provides <strong>clarifications on retrospective applicability, ITC eligibility, and co-guarantor liability</strong>.</li></ul><hr><h3><strong>2. Clarifications on Taxability and Valuation</strong></h3><h4>✅ <strong>Applicability to Guarantees Issued Before October 26, 2023</strong></h4><ul><li><strong>Corporate guarantee services were taxable even before Rule 28(2) was introduced</strong>.</li><li>However, the <strong>valuation method before October 26, 2023, followed the previous version of Rule 28</strong>.</li><li><strong>For guarantees issued or renewed on/after October 26, 2023, the new 1% valuation rule applies</strong>.</li></ul><h4>✅ <strong>GST Liability When Loan is Partially or Not Availed</strong></h4><ul><li>The <strong>GST valuation is based on the guarantee amount, NOT the actual loan disbursed</strong>.</li><li><strong>ITC is available immediately</strong> upon guarantee issuance, regardless of whether the loan is disbursed.</li></ul><h4>✅ <strong>GST on Loan Takeovers and Renewals</strong></h4><ul><li>If a <strong>loan is transferred to another bank without issuing a new guarantee, GST is not applicable</strong>.</li><li>However, if a <strong>new guarantee is issued or the existing one is renewed, GST applies</strong>.</li></ul><h4>✅ <strong>GST Liability for Co-Guarantors</strong></h4><ul><li>If <strong>multiple companies act as co-guarantors</strong>, GST is <strong>split proportionally</strong> based on their guarantee share.</li><li>Example: If <strong>Company A guarantees 60% and Company B 40%</strong>, then <strong>A pays GST on 0.6% of the amount, and B on 0.4%</strong>.</li></ul><h4>✅ <strong>Reverse Charge Mechanism (RCM) on Foreign Guarantees</strong></h4><ul><li><strong>Domestic corporate guarantees attract forward charge GST</strong> (guarantor issues invoice).</li><li><strong>Foreign parent company guarantees for Indian subsidiaries are taxable under RCM</strong>, meaning <strong>the Indian entity must pay GST</strong>.</li></ul><h4>✅ <strong>GST Payment Frequency for Long-Term Guarantees</strong></h4><ul><li><strong>For multi-year guarantees, GST is payable on the full period upfront</strong>.</li><li>Example: A <strong>5-year guarantee attracts 5% GST upfront (1% per year)</strong>.</li></ul><h4>✅ <strong>Benefit of Declared Invoice Value for ITC</strong></h4><ul><li>If <strong>full ITC is available to the recipient</strong>, then <strong>the invoice value is deemed as open market value</strong>, reducing valuation disputes.</li></ul><h4>✅ <strong>Exports of Corporate Guarantee Services are Not Covered Under Rule 28(2)</strong></h4><ul><li>If the <strong>recipient is outside India</strong>, <strong>Rule 28(2) does not apply</strong>, confirming that <strong>exports are zero-rated</strong>.</li></ul><hr><h3><strong>3. Implications for Businesses</strong></h3><ul><li><strong>Companies must reassess past guarantees</strong> to check if GST applies retroactively.</li><li><strong>Loan takeovers don’t attract fresh GST unless a new guarantee is issued</strong>.</li><li><strong>Foreign parent company guarantees require RCM compliance in India</strong>.</li><li><strong>Multi-year guarantees must consider upfront GST payments</strong>.</li><li><strong>ITC availability is clarified, making compliance easier</strong>.<a href="https://cms.plasament.com/storage/nisha/circular-no-225-2024.pdf">circular-no-225-2024</a><br> </li></ul>