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CA Final · Indirect Tax Laws · Value of Supply

Rao Industries Ltd, Hyderabad, gives a corporate guarantee of Rs 5 crore to a bank on behalf of its related subsidiary Rao Components Ltd, located in India, for a loan, for a full year. Rao Industries charges no consideration for this service. Rao Components is not eligible for full input tax credit. For another guarantee of Rs 8 crore, Rao Industries charges an actual annual fee of Rs 12 lakh and the recipient is likewise ineligible for full credit. Which statement about the values of supply is correct as per the CGST Rules, 2017?

The first guarantee is valued at Rs 5,00,000 and the second at Rs 12,00,000. The rule deems value at one per cent of the guarantee amount per annum or actual consideration, whichever is higher, and here the recipients are ineligible for full credit.

  1. AFirst guarantee Rs 5,00,000; second guarantee Rs 12,00,000Correct
  2. BFirst guarantee nil; second guarantee Rs 12,00,000
  3. CFirst guarantee Rs 5,00,000; second guarantee Rs 8,00,000
  4. DFirst guarantee Rs 5,00,000; second guarantee Rs 20,00,000

Explanation

For related recipients located in India, value is deemed to be 1% of guarantee amount per annum or actual consideration, whichever is higher. First: 1% of Rs 5 crore is Rs 5,00,000 against nil actual, so Rs 5,00,000. Second: 1% of Rs 8 crore is Rs 8,00,000 and actual is Rs 12,00,000, the higher, so Rs 12,00,000. Option with nil ignores the deeming rule.

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