Taxability of Personal Guarantee and Corporate Guarantee under GST| Clarified by CBIC

Personal Guarantee and Corporate Guarantee

Providing guarantee is a very common part of business finance wherein one person provides guarantee to the bank or financier on behalf of the other person for securing loan or credit facility. In some cases, commission is paid as a consideration for providing guarantee. CBIC has received various representations with respect to applicability of GST on personal guarantee provided by Director to the bank for granting credit facility to the company or corporate guarantee provided by the company on behalf of its sister concern or subsidiary company.

CBIC has clarified all the issues related to personal guarantee and Corporate guarantee vide Circular No. 204/16/2023-GST dated 27th october, 2023. Detailed analysis of circular is as follows:

1. Personal Guarantee provided by Director without any consideration

Issue

Whether the personal guarantee provided by the Director to the Bank or Financial Institution for sanctioning of credit facilities to the company without any consideration is liable to GST?

Clarification

  1. Whether considered as supply or not?
  • As per Explanation (a) to Section 15 of CGST Act, The Company and directors are considered as related parties.
  • As per Entry No. 2 of Schedule I of CGST Act, supply of goods or services between related persons in course or furtherance of business is considered as “Supply” even if made without consideration.
  • Therefore, the activity of providing personal guarantee by the director for the company is considered as supply even if made without consideration.
  1. Valuation
  • Valuation provisions in case of transaction between related parties are given under Rule 28 of CGST Rules.
  • As per Rule 28, taxable value shall be the open market value.
  • RBI Regulations related consideration for personal guarantee

The RBI has issued following detailed guidelines for obtaining personal guarantee of promoters, directors and other managerial personnel vide Circular No. RBI/2021-22/121 dated 9th November, 2021.

  • The bank should take personal guarantee from above mentioned persons only when absolutely warranted after the detailed examination of facts.
  • While determining circumstances under which guarantee may be considered necessary, the bank should consider worth of the guarantor, payment of guarantee commission etc. in following manner:
    • In case of personal guarantees of directors, the guarantee amount should bear a reasonable proportion to the estimated worth of such person.
    • The system of obtaining guarantees should not be used by such persons as a source of making income from the company.
    • Therefore, Banks should obtain an undertaking from the borrowing company as well as the guarantors that no Consideration in form of commission or any fee would be paid by the company to such persons whether directly or Indirectly. 
    • This requirement should be incorporated in the bank’s terms and conditions for sanctioning of credit limits.
    • However, the company may pay consideration in exceptional cases.
  • Therefore, as per RBI regulations, the company can’t pay any commission or other consideration for personal guarantee. Accordingly, there is no question that these transactions have any open market value.
  • Therefore, open market value of personal guarantee shall be zero and no tax is payable by the director on such supply.
  • Further, in exceptional circumstances where consideration is paid by the company for personal guarantee, taxable value shall be the consideration paid by the company to such person.

2. GST on Corporate Guarantee provided without consideration

Issue

Whether GST is applicable on corporate guarantee provided by the Company on behalf of another company or by holding company on behalf of subsidiary company even when made without any consideration?

Clarification

  1. Where the corporate guarantee is provided by a company for another company where both the companies are related, then such activity shall be considered as a supply of service as per Schedule I of CGST Act, even if made without any consideration.
  2. Holding company and subsidiary company are related parties. Therefore, the corporate guarantee provided by the holding company for subsidiary companies is considered as supply of service even if made without consideration.
  3. Valuation of such supply of service shall be determined in accordance with newly inserted Rule 28(2) of CGST Rules inserted vide notification No. 52/2023 dated 26th October, 2023 irrespective of whether Full ITC is available to the recipient of the service or not.
  4. However, provisions of Rule 28(2) of CGST Act shall not apply in respect of personal guarantee provided by the Director for their companies.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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