SBLC / Corporate Guarantee is provided by an International bank/parent company to a bank in India to provide overdraft facilities to their subsidiary company in India.
Whether the charges paid by the parent company to the International Bank and debited to the company in India shall be subject to GST?
Let us examine the transaction involves in providing SBLC or Corporate guarantee.
Standby Letter of Credit (SBLC) is issued by International Bank to an Indian Bank as security to provide overdraft facilities for a certain amount to a company in India.
It is a standard operative procedure followed by Banks in India to take collateral for granting fund based limits to its clients. The company must provide SBLC issued by the bank of its parent company or hypothecate fixed assets or create a charge on current assets. The act of arranging SBLC by the parent company from their bankers outside India is a service provided to the Indian subsidiary company shall be covered in the definition of service which is defined as " anything other than goods, money & securities .,
The ‘‘import of services” means the supply of any service, where––
(i) the supplier of service is located outside India;
(ii) the recipient of service is located in India; and
(iii) the place of supply of service is in India;
The above transaction of arranging SBLC shall be covered under import of services as the supplier of services is outside India while service recipient i.e. the company is in the taxable territory of India.
Further, as per schedule, I of the CGST Act 2017, Import of services from a related person even without consideration is a taxable supply.
In the instance case, the parent company has provided services of arranging SBLC for overdraft facility of the company in India hence it qualifies as an import of services even if without consideration. However, often parent company claims the reimbursement of expenses incurred by the parent company.
This reimbursement is not towards the discharge of obligation of the Indian subsidiary company as the services are obtained by the parent company from their bankers. Hence its parent company’s obligation towards their bankers as consideration for obtaining their service of issuance of SBLC.
The act of arranging SBLC from their bankers to the banker of Indian subsidiary to facilitate them to obtain fund based credit limits from their bankers is a provision of service by the parent company to Indian subsidiary company. The Indian company need to pay GST on RCM basis being the import of services as per entry no I of Notification no 10/2017-IGST.
Now, what should be the " transaction value” for paying GST.
The amount claimed by the parent company as reimbursement of expenses incurred for SBLC is an open market value as this has been incurred by the parent company.
The three main parties in a standard corporate guarantee are:
The guarantor, who is a parent company agreeing to perform the legal obligation by taking over the payments of the loan if the subsidiary is unable to perform its obligation
The lender, who is a banking company to whom the debt is owed
The debtor, the subsidiary company receiving the money and who is responsible to pay back the loan.
The act of providing a corporate guarantee is the service provided by the parent company to its subsidiary hence qualifies as an import of services and liable to RCM for which no consideration is charged by the parent company.
Now, what should be the transaction value on which GST be paid?
In case of Corporate Guarantee, parent company incurs certain expenditures such as professional expenses for drafting the document, registration expenses etc. which is reimbursed by the subsidiary company hence these expenses be taken as transaction value.
The input tax credit shall be available for the GST paid on this transaction to the Indian subsidiary company.