Highlights of Recent CBIC Circulars issued on 11.07.2024 on Corporate Guarantees, Outstanding Dues Recovery, and Refund Procedures: PART 1

On July 11, 2024, the Central Board of Indirect Taxes and Customs (CBIC) released several Circulars to implement recommendations from the 53rd GST Council Meeting held on June 22, 2024. These Circulars provide clarity on various issues, including the recovery of outstanding dues, adjustments for pre-deposits under the CGST Act, the taxability and valuation of corporate guarantees, and refund procedures for additional IGST paid due to post-export price revisions and tax paid on inward supplies for the Canteen Stores Department (CSD).

Summary of Circulars:

A. Circular No. 224/18/2024-GST: Clarifications on Outstanding Dues Recovery and Pre-Deposit Adjustments

Given the non-establishment of the GST Appellate Tribunal, taxpayers have faced challenges in appealing against decisions of the first appellate authority. This has led to questions about how to handle the recovery of outstanding dues and the adjustment of amounts paid via FORM GST DRC-03. To address the non-constitution of the GST Appellate Tribunal, the GST authorities have provided a mechanism for taxpayers to stay recovery proceedings by paying the required pre-deposit amount and filing an undertaking.

Key Points:

1. Background:

• Due to the non-constitution of the GST Appellate Tribunal, taxpayers are unable to file appeals against the decisions of the first appellate authority.

2. Appeal Process and Recovery Stay:

• Taxpayers currently cannot appeal to the GST Appellate Tribunal.

• Recovery proceedings commence if the due amount is not paid within three months of the order.

• Filing an appeal with the required pre-deposit stays the recovery until the appeal is resolved.

3. Payment of Pre-deposit:

• Taxpayers can make pre-deposit payments via the Electronic Liability Register (ELL) Part-II on the GST portal.

• Navigation path: Services >> Ledgers >> Payment towards demand.

• The pre-deposit amount will be mapped against the specific outstanding demand order and adjusted accordingly.

4. Undertaking Requirement:

• Taxpayers must file an undertaking with the proper officer, declaring their intent to file an appeal once the Tribunal is operational.

• Upon payment of the pre-deposit and submission of the undertaking, recovery of the remaining demand amount will be stayed.

5. Non-Compliance Consequences:

• If the taxpayer does not make the pre-deposit payment or submit the undertaking, it is presumed that the taxpayer is not willing to file an appeal, and recovery proceedings will commence.

• Post-constitution of the Tribunal, failure to file an appeal within the prescribed timeline will result in recovery of the remaining demand amount.

6. Adjustment of Payments Made through FORM GST DRC-03:

• Taxpayers who have inadvertently paid amounts intended for demand through FORM GST DRC-03 can file FORM GST DRC-03A to adjust these payments against the demand.

• The amounts will be treated as paid towards the demand from the date of intimation through FORM GST DRC-03.

7. FORM GST DRC-03A Functionality:

• Currently, the functionality for FORM GST DRC-03A is not available on the GST portal.

• Until this functionality is available, taxpayers should inform the proper officer about the inadvertent payments through FORM GST DRC-03.

• Upon such intimation, the proper officer may not insist on recovery for the remaining amount payable by the taxpayer until the functionality of FORM GST DRC-03A is made available.

• Once the functionality is available, taxpayers must file FORM GST DRC-03A to formalize the adjustment.

8. Implementation:

• The mechanism to adjust payments made inadvertently through FORM GST DRC-03 has been provided via Notification No. 12/2024-Central Tax dated 10.07.2024.

• Sub-rule (2B) of Rule 142 and FORM GST DRC-03A have been inserted in Central Goods and Services Rules, 2017.

B. Circular No. 225/19/2024-GST: Taxability and Valuation of Corporate Guarantees

The Circular clarifies the taxability and valuation of corporate guarantees between related persons, ensuring uniform implementation across various jurisdictions.

Key Points:

1. Purpose:

   • To clarify the taxability and valuation of services related to providing corporate guarantees between related persons.

2. Applicability to Guarantees Issued Before October 26, 2023:

   • GST was applicable to corporate guarantees before October 26, 2023.

   • Valuation before this date follows the then-existing Rule 28, while valuation for guarantees issued or renewed on or after this date follows Rule 28(2).

3. Valuation Based on Partly or Non-Availed Loans:

• The service of providing a corporate guarantee is valued based on the amount guaranteed, not on the actual loan disbursed.

• ITC eligibility for the recipient is independent of the actual loan disbursed

4. Takeover of Existing Loans:

   • The takeover of loans by another banking company/financial institution does not constitute a service of providing a corporate guarantee.

   • No GST impact unless a new corporate guarantee is issued or renewed upon the takeover.

5. Multiple Co-guarantors:

   • When multiple related entities provide a corporate guarantee, the service`s value is the sum of the actual consideration paid/payable to co-guarantors if higher than 1% of the guaranteed amount.

   • If the sum is less than 1%, GST is payable by each co-guarantor proportionately on 1% of the guaranteed amount.

6. Intra-group Corporate Guarantees:

   • Domestic corporates issuing intra-group guarantees: GST is paid under the forward charge mechanism.

   • Foreign guarantees for Indian entities: GST is payable under the reverse charge mechanism by the Indian entity.

7. Frequency of Tax Payment:

• Rule 28(2) of the CGST Rules, amended retrospectively from October 26, 2023, mandates GST payable on 1% of the guaranteed amount per annum or actual consideration, whichever is higher.

• For guarantees provided for less than a year, valuation is proportionate to the period (e.g., half a year equals half of 1% of the guaranteed amount or the actual consideration, whichever is higher).

8. Valuation with Full Input Tax Credit (ITC):

   • A proviso in sub-rule (2) of Rule 28, effective from October 26, 2023, deems the invoice value as the open market value where full ITC is available to the recipient.

9. Export of Corporate Guarantee Services:

• Rule 28(2) does not apply to exports where the service recipient is located outside India.

• This amendment in sub-rule (2) of Rule 28 is effective retrospectively from October 26, 2023.

Rule 28 is reproduced hereunder for ready reference-

“Rule 28. Value of supply of goods or services or both between distinct or related persons, other than through an agent.-

[1] The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall-

(a) be the open Market value of such supply;

(b) if the open Market value is not available, be the value of supply of goods or services of like kind and quality;

(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:

Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person:

Provided further that where the recipient is eligible for full Input tax credit, the value declared in the invoice shall be deemed to be the open Market value of the goods or services.

(2) Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person located in India, by way of providing corporate guarantee to any Banking company or financial institution on behalf of the said recipient, shall be deemed to be one per cent of the amount of such guarantee offered per annum, or the actual consideration, whichever is higher.

Provided that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the value of said supply of services.”