CBIC vide, its Circular dated 27.10.2023 has made certain clarifications on the valuation of transactions
between related entities on providing corporate guarantees to a subsidiary or other related entities for a loan, etc.
obtained by said subsidiary or other related entities from banks / financial institutions.
As per GST Law, transactions between related parties are taxable even made without consideration, however, the valuation used to be determined as per Rule no. 28 of CGST Rules. Further, where the recipient-related person is entitled to the ‘full input tax credit’, the second proviso of Rule 28 allows declaring any value on the invoice which shall be deemed to be the open market value of the goods or services.
The recent amendments in GST rules or even the circular have provided provisions/clarifications about
determining the value of said transactions. The taxability of such transactions is perhaps not disputed as it was always taxable. Accordingly, with effect from 26.10.2023, the value of said transactions shall be determined at 1% of the guaranteed amount or actual consideration whichever is higher. This value shall be applicable and the entity cannot apply proviso to Rule 28 in such transactions.
However, there may still be certain grey areas where clarifications are needed. For instance, whether the valuation will be one-time or is applicable for a defined period; there are certain other guarantees given by the holding Company on behalf of its subsidiaries, which perhaps missed to be covered by the amendments. We believe taxability should occur basis of the tenure of the bank guarantee e.g., if the bank guarantee tenure is for 5 years, then taxability should be one time for 5 years. However, if the tenure of the bank guarantee renews every year, then authorities might contest to be taxable each year.
Also, for prior periods, as a proviso to Rule 28 will apply, the entities can consider valuing the transaction as per open market value or may adopt a value of 1% however, the onus to prove the arm’s length price will be on the entity.
SW Comments:
The taxability of said transactions was never a question, valuation was. Through this amendment, the Government has tried to remove difficulties in determining the value of said transactions. Taxpayers must pay the GST liability for the past period if any, as taxability always existed. However, with the open issues, we can see another set of litigations.
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