TAXABILITY OF PERSONAL GUARANTEE AND CORPORATE GUARANTEE IN GST

Whether the activity of providing a personal guarantee by the director of a company to the bank or financial institutions for the sanctioning of credit facilities to the said company without any consideration will be treated as a supply of service or not, and whether the same will attract GST or not.

In such a scenario, no tax is payable on such a supply of service by the director to the company. and in cases where the director, who had provided the guarantee, is no longer connected with the management, but the continuation of his guarantee is considered essential. The taxable value of such a supply of service shall be the remuneration or consideration provided to such a person or guarantor by the company, directly or indirectly.

• The director and the company are to be treated as related persons. (As per Explanation (a) to section 15 of CGST Act,)

• The supply of goods or services or both between related persons, when made in the course or furtherance of business, shall be treated as supply even if made without consideration. (As per clause (c) of sub-section (1) of section 7 of the CGST Act, 2017, read with S. No. 2 of Schedule I of CGST Act.)

• Accordingly, the activity of providing personal guarantees by the director to the banks and financial institutions for securing credit facilities for their companies is to be treated as a supply of service, even when made without consideration.

• The taxable value of such supply of service shall be the open market value of such supply. (In terms of Rule 28 of CGST Rules.)

• RBI has provided guidelines for obtaining personal guarantees of promoters, directors, and other managerial personnel of the borrowing concerns.(Para 2.2.9 of its Circular No. RBI/2021-22/121 dated 9th November, 2021,)

• As per the said circular, no consideration by way of commission, brokerage fees, or any other form can be paid to the director by the company, directly or indirectly, in lieu of providing a personal guarantee to the bank for borrowing credit limits.

• Accordingly, the open market value of the said transaction or supply may be treated as zero, and therefore, the taxable value of such supply may be treated as zero.

Whether the activity of providing a corporate guarantee by a person on behalf of another related person or by the holding company for sanction of credit facilities to its subsidiary company or to the bank or financial institutions, even when made without any consideration, will be treated as a taxable supply of service or not, and if taxable, what would be the valuation of such a supply of services?

• The value of supply of services by a supplier to a recipient who is a related person, by way of providing a corporate guarantee to any banking company or financial institution on behalf of the said recipient, shall be deemed to be one percent of the amount of such guarantee offered or the actual consideration, whichever is higher.(sub-rule (2) has been inserted in rule 28 of CGST Rules via Notification No. 52/2023 dated October 26, 2023)

• It is clarified that the sub-rule (2) of Rule 28 shall not apply in respect of the activity of providing personal guarantees by the director to the banks or financial institutions for securing credit facilities for their companies, and the same shall be valued in the manner provided in S. No. (1) above.

You can refer circular by clicking below link:

https://taxinformation.cbic.gov.in/view-pdf/1003187/ENG/Circulars

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