Circular No. 154/10/2021: GST on Government Loan Guarantees

Answer: Circular No. 154/10/2021-GST clarifies the GST treatment of loan guarantee services provided by the Central or State Government to their undertakings or PSUs.
The circular was issued on 17 June 2021 after representations were received seeking clarification on whether GST applied when the government guaranteed loans taken by its undertakings or PSUs. The issue was examined by the 43rd GST Council meeting held on 28 May 2021. CBIC then reiterated that the qualifying service is exempt under Entry No. 34A.

Answer: No, the qualifying government guarantee service is specifically exempt under Entry No. 34A.
The exemption applies to services supplied by the State Government to its undertaking or PSU by way of guaranteeing loans taken by that undertaking or PSU from banking companies or financial institutions. Circular No. 154/10/2021-GST reiterates this exemption. The transaction should still be checked against the specific conditions of Entry No. 34A before claiming the exemption.

Answer: Yes, Central Government guarantees are also covered where the conditions of Entry No. 34A are satisfied.
Entry No. 34A covers services supplied by the Central Government, State Government or Union Territory to their undertakings or PSUs by way of guaranteeing qualifying loans. CBIC specifically reiterated that guaranteeing loans by Central or State Government for their undertakings or PSUs is exempt under the entry.

Answer: No. The exemption is not a blanket exemption for every government guarantee.
Entry No. 34A specifies the nature of the recipient, the nature of the service and the source of the loan. The service must be supplied to the government's undertaking or PSU by way of guaranteeing a loan taken from a banking company or financial institution. If a transaction does not satisfy these conditions, the exemption should not simply be assumed on the basis of this circular.

Answer: Yes, Entry No. 34A specifically refers to loans taken from banking companies and financial institutions.
This is an important condition of the exemption. The circular does not say that every government guarantee, irrespective of the underlying lender, is exempt. Therefore, while reviewing the transaction, the taxpayer or government entity should verify the nature of the lender and ensure that it falls within the wording of the exemption entry.

Answer: No. The circular reiterated an exemption that was already provided under Entry No. 34A.
Entry No. 34A of Notification No. 12/2017-Central Tax (Rate) dated 28 June 2017 already exempted the specified government loan guarantee service. CBIC stated in the circular that, as recommended by the GST Council, it was reiterating that guaranteeing loans by the Central or State Government for their undertaking or PSU is specifically exempt under that entry.

Answer: The clarification was issued because representations had been received regarding GST applicability on government loan guarantees provided to undertakings or PSUs.
The issue was considered by the 43rd GST Council meeting held on 28 May 2021. Following the Council's recommendation, CBIC reiterated the exemption under Entry No. 34A. So, the circular was intended to provide clarity and uniformity on an issue that had been raised by stakeholders.

Answer: The entity should maintain documents that clearly establish the conditions of the exemption.
In practice, this would include the government guarantee document, loan documentation, details identifying the lending bank or financial institution, and documents establishing the recipient's status as the relevant government undertaking or PSU. The circular itself does not prescribe a separate documentation checklist, so these are practical records supporting the conditions stated in Entry No. 34A rather than additional requirements created by the circular.

Answer: The circular does not extend the stated exemption to private companies generally.
The exemption under Entry No. 34A is specifically worded for services supplied by the Central Government, State Government or Union Territory to their undertakings or PSUs. Therefore, a guarantee given to a private company cannot automatically be treated as exempt under this entry merely because a government authority has provided the guarantee. The particular GST provisions applicable to that transaction would need to be examined separately.