GST framework for corporate guarantees undergoes valuation changes

Corporate guarantees have become a significant area of indirect tax litigation and debate within the Goods and Services Tax (GST) framework. These guarantees, where a company commits to meeting the obligations of a principal debtor, are frequently used within corporate groups to secure more favorable borrowing terms by leveraging the creditworthiness of established entities.

The legal treatment of these transactions has evolved through distinct periods. From July 1, 2017, to October 25, 2023, guarantees between related persons were governed by existing sections of the CGST Act and Rule 28. A significant shift occurred on October 26, 2023, with the introduction of Rule 28(2), which established a specific valuation mechanism for corporate guarantees. This change, accompanied by retrospective amendments and departmental clarifications, has intensified discussions regarding how these transactions are characterized as supplies and how they should be valued.

Key areas of focus include the distinction between goods and services, the implications of export of services when guarantees are issued to foreign subsidiaries, and the evolving judicial and administrative jurisprudence provided by CBIC circulars.