Central Board of Indirect Taxes and Customs (CBIC) via Circular No 204/16/2023-GST has issued clarification on issues pertaining to taxability of personal guarantee and corporate guarantee in GST.
Key points of the Circular are:
1. Taxability of Personal Guarantee by Directors
a. As per Explanation (a) to section 15 of CGST Act, the director and the company are to be treated as related persons. As per section 7(1)(c) of the CGST Act, 2017, read with S. No. 2 of Schedule I of CGST Act, 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. Hence, the activity of providing personal guarantee by the Director to the banks/ financial institutions for securing credit facilities for their companies is to be treated as a supply of service, even when made without consideration. Rule 28 of CGST Rules relating to method for determining the value of the supply of goods or services or both between related parties, other than where the supply is made through an agent, the taxable value of such supply of service shall be the open market value of such supply.
It has been clarified that, as the RBI mandates that no consideration by way of commission, brokerage fees or any other form, can be paid to the director by the company, for providing personal guarantee to the bank for borrowing credit limits. Accordingly, the open market value of the said transaction/ supply may be treated as zero and therefore, taxable value of such supply may be treated as zero. No tax is payable on such supply of service by the director to the company.
b. In cases where the director, who had provided the guarantee, is no longer connected with the management but continuance of his guarantee is considered essential because the new management’s guarantee is either not available or is found inadequate, or there may be other exceptional cases where the promoters, existing directors, other managerial personnel, and shareholders of borrowing concerns are paid remuneration/ consideration in any manner, directly or indirectly.
It has been clarified that in all such cases, the taxable value of such supply of service shall be the remuneration/ consideration provided to such a person/ guarantor by the company.
2. Taxability of Corporate Guarantee
Incase the corporate guarantee is provided by a company to the bank/financial institutions for providing credit facilities to the other company, where both the companies are related, the activity is to be treated as a supply of service between related parties as per provisions of Schedule I of CGST Act, even when made without any consideration. Similarly, the corporate guarantee is provided by a holding company, for its subsidiary company, even when made without any consideration, is to be treated as a supply of service by holding company to the subsidiary company, being a related person.
It has been clarified that, in all such cases of supply of services by a related person to another person, or by a holding company to a subsidiary company, in the form of providing corporate guarantee on their behalf to a bank/ financial institution, the taxable value of such supply of services, will henceforth shall be deemed to be one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher (as per the provisions of the Rule 28 (2) of CGST Rules), irrespective of whether full ITC is available to the recipient of services or not.
Source: Central Board of Indirect taxes and Customs (CBIC)
