With all due respect, it appears that the circular extends beyond the provisions of GST and couldn’t address the inherent nature of guarantee contracts. The following extract may shed some light on the reasoning:
“The activity of supplying the service of providing a corporate guarantee is not linked with the actual disbursal of the loan. The service provided by the guarantor to the guarantee is essentially taking on the risk of default. Therefore, it is clarified that the value of the supply of the service of providing a corporate guarantee will be calculated based on the amount guaranteed and will not be based on the amount of loan actually disbursed to the recipient of the corporate guarantee.”
One might ask, can the risk of default arise if the loan is not disbursed at all?
“To illustrate, if a corporate guarantee is issued for a period of, say, five years, then the value of such guarantee is to be calculated at one per cent per year of the amount of such guarantee offered, or the actual consideration, whichever is higher. In other words, the value of such corporate guarantee provided would be 5% of the amount guaranteed or the actual consideration, whichever is higher. Therefore, GST would be payable on such amount at the time of issuance of such corporate guarantee, i.e., 5% of the amount guaranteed or the actual consideration, whichever is higher.”
‼️This seems to contradict the previous paragraph where it is clarified that the supply is essentially the default risk taken by the guarantor. Isn’t the default risk related to the potential default rather than the total amount guaranteed? How is the period relevant if at all the risk covers the entire defaulted amount??‼️
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