2024 (10) TMI 771 - AAR - GST

Levy of GST - value of loan for which guarantee is given needs to be divided equally amongst the relevant years of guarantee - reverse charge mechanism - 1% of total value of loan in first year - 1% of only remaining outstanding value of loan at beginning of each subsequent year - continuing guarantee. Whether GST under reverse charge mechanism on issuance of corporate guarantee is payable one-time or on periodical basis, considering that the guarantee has been issued only once and is valid for specified period of time without requirement of any periodical renewal in terms of Rule 28 (2) of the CGST Rules? - HELD THAT - In the instant case, the Corporate Guarantee is received by the Applicant i.e. subsidiary company from Foreign Group Companies in respect of loan taken from banks and financial institution for which Foreign Company does not charge any consideration from the Applicant leading to the conclusion that it is import of service received by the Applicant. Since in the instant case, as no consideration has been charged by the Associated Enterprises from the Applicant and where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply i.e. Indian subsidiary and the GST liability is to paid by the Applicant at one time basis at the time of supply. If the GST under RCM is to be paid on periodical basis, then in order to determine the value of supply, whether the value of loan is to be divided equally amongst the relevant years of guarantee and GST is to be paid considering 1% of such divided deemed value each year or 1% of only remaining outstanding value of loan at the beginning of each subsequent year in term of Rule 28 (2) of the CGST Rules 2017? - HELD THAT - If the guarantor executes the contract of guarantee without consideration, in the GST regime prior to 26.10.2023, for the benefit of a related party, GST would be payable on the basis of the valuation mechanisms as per Rule 28 (1) of RGST/CGST rules 2017 at the time of execution of the contract - GST under reverse charge mechanism is payable on 1% of deemed total value of loan after guarantees executed after 26-10-2023 as per rule 28 (2) of RGST/CGST rules 2017 on one time basis at the time of execution of the contract, if the guarantor executes the contract of guarantee without consideration, for the benefit of a related party in the GST regime post 26.10.2023.

Summary

Issues Involved:

1. Whether GST under reverse charge mechanism on issuance of corporate guarantee is payable one-time or on a periodical basis.
2. Determination of the value of supply for GST purposes if it is to be paid periodically under reverse charge mechanism.

Issue-wise Detailed Analysis:

1. GST Liability on Corporate Guarantee: One-time or Periodical Basis

The applicant sought an advance ruling to determine whether GST under the reverse charge mechanism on the issuance of a corporate guarantee is payable once or periodically. The applicant argued that the corporate guarantee provided by the foreign group company is a one-time guarantee and not a continuous supply of service as per Section 2(33) of the CGST Act. The applicant emphasized that the guarantee is valid for a specified period without the need for periodic renewal, thus constituting a one-time supply.

The jurisdictional officer supported the view that the provision of a corporate guarantee is not a continuous supply of service. The officer explained that the service is crystallized at the point of execution of the guarantee deed, and the benefit of the guarantee accrues to the principal debtor at that time. Therefore, GST liability should be discharged one-time at the time of execution of the contract.

The ruling concluded that GST under the reverse charge mechanism is required to be paid one-time, considering that the guarantee is issued only once and is valid for a specified period without periodic renewal, in accordance with Rule 28(2) of the CGST Rules.

2. Determination of Value of Supply for GST Purposes

The applicant also sought clarification on the methodology for determining the value of supply if GST is to be paid periodically. They proposed two methods: dividing the value of the loan equally among the relevant years of the guarantee or calculating GST on 1% of the total value of the loan in the first year and on 1% of the remaining outstanding value in subsequent years.

The jurisdictional officer clarified that for corporate guarantees executed after 26.10.2023, GST under reverse charge mechanism is payable on 1% of the deemed total value of the loan on a one-time basis at the time of execution of the contract. This applies when the guarantor executes the contract without consideration for the benefit of a related party.

The ruling emphasized that since GST is to be paid one-time, there is no need for periodic payment. The value of supply shall be determined based on Rule 28(2) of the CGST Rules, which mandates a one-time payment of GST on 1% of the deemed total value of the loan at the time of execution of the contract.

Conclusion:

The ruling clarified that GST under the reverse charge mechanism on the issuance of a corporate guarantee is payable one-time and not periodically, as the guarantee is a one-time issuance without periodic renewal. The value of supply for GST purposes is determined as 1% of the deemed total value of the loan at the time of execution of the guarantee contract, applicable for guarantees executed post 26.10.2023.