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Circular No. 204/16/2023-GST
F. No. 20/06/22/2023-GST-CBEC
Government of India
Ministry of Finance
Department of Revenue
Central Board of Indirect Taxes and Customs
GST Policy Wing
*****
New Delhi, Dated the 27th October, 2023
To,
The Principal Chief Commissioners/ Chief Commissioners/ Principal
Commissioners/ Commissioners of Central Tax (All)
The Principal Directors General/ Directors General (All)
Madam/Sir,
Subject: Clarification on issues pertaining to taxability of personal guarantee and
corporate guarantee in GST-reg.
Representations have been received from the trade and field formations seeking
clarification on certain issues with respect to taxability of activity of providing personal
bank guarantee by Directors to banks for securing credit facilities for the company. Similarly,
clarifications are being sought with respect to taxability and valuation of the activity of
providing corporate guarantee by a related person to banks/financial institutions for another
related person, as well as by a holding company in order to secure credit facilities for its
subsidiary company.
2.
In order to ensure uniformity in the implementation of the provisions of law across
the field formations, the Board, in exercise of its powers conferred by section 168 (1) of the
Central Goods and Services Tax Act, 2017 (hereinafter referred to as “CGST Act”), hereby
clarifies the issues as under:
S.
No.
Issue
Clarification
1.
Whether the activity of providing
personal guarantee by the Director of
a company to the bank/ financial
institutions for 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.
As per Explanation (a) to section 15 of
CGST Act, the director and the company
are to be treated as related persons. 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, 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.
Accordingly, 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 Central Goods and Services Tax
Rules, 2017 (hereinafter referred to as
“CGST Rules”) prescribes the 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. In terms of Rule 28
of CGST Rules, the taxable value of such
supply of service shall be the open market
value of such supply.
RBI has provided guidelines for obtaining
personal guarantee of promoters, directors
and other managerial personnel of the
borrowing concerns vide Para 2.2.9 of its
Circular No. RBI/2021-22/121 dated 9th
November, 2021, which is reproduced
below:
“2.2.9 Guidelines relating to obtaining of
personal
guarantees
of
promoters,
directors, other managerial personnel,
and shareholders of borrowing concerns
Banks should take personal guarantees of
promoters, directors, other managerial
personnel or major shareholders for the
credit facilities granted to corporates,
public or private, only when absolutely
warranted after a careful examination of
the circumstances of the case and not as a
matter of course. In order to identify the
circumstances under which the guarantee
may or may not be considered necessary,
banks should be guided by the following
broad considerations:
…………………..
C. Worth of the guarantors, payment of
guarantee commission, etc
Where personal guarantees of directors
are
warranted,
they
should
bear
reasonable proportion to the estimated
worth of the person. The system of
obtaining guarantees should not be used
by the directors and other managerial
personnel as a source of income from the
company.
Banks
should
obtain
an
undertaking from the borrowing company
as well as the guarantors that no
consideration
whether
by
way
of
commission, brokerage fees or any other
form, would be paid by the former or
received
by
the
latter,
directly
or
indirectly. This requirement should be
incorporated in the bank's terms and
conditions for sanctioning of credit limits.
During the periodic inspections, the bank's
inspectors
should
verify
that
this
stipulation has been complied with. There
may, however, be exceptional cases where
payment
of
remuneration
may
be
permitted e.g. where assisted concerns are
not
doing
well
and
the
existing
guarantors are no longer connected with
the management but continuance of their
guarantees
is
considered
essential
because the new management's guarantee
is either not available or is found
inadequate.
…………………..”
Accordingly, as per mandate provided by
RBI in terms of Para 2.2.9 (C) of RBI’s
Circular No. RBI/2021-22/121 dated 9th
November, 2021, 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 personal guarantee to the bank
for borrowing credit limits. As such, when
no consideration can be paid for the said
transaction by the company to the director
in any form, directly or indirectly, as per
RBI mandate, there is no question of such
supply/ transaction having any open
market value. 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. In such a
scenario, no tax is payable on such
supply of service by the director to the
company.
There may, however, be 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. In all these cases, the taxable
value of such supply of service shall be the
remuneration/ consideration provided to
such a person/ guarantor by the company,
directly or indirectly.
2. Whether the activity of providing
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, to the bank/ 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 supply of services.
Where
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, where the corporate guarantee
is provided by a holding company, for its
subsidiary company, those two entities also fall
under the category of ‘related persons’. Hence
the activity of providing corporate guarantee
by a holding company to the bank/financial
institutions for securing credit facilities for its
subsidiary company, even when made without
any consideration, is also to be treated as a
supply of service by holding company to the
subsidiary company, being a related person, as
per provisions of Schedule I of CGST Act.
In respect of such supply of services by a
person to another related person or by a
holding company to a subsidiary company, in
form of providing corporate guarantee on their
behalf to a bank/ financial institution, the
taxable value will be determined as per rule 28
of CGST Rules.
Considering
different
practices
being
followed by the field formations and taxpayers
in determining such taxable value, in order to
provide uniformity in practices and ease of
implementation, sub-rule (2) has been inserted
in rule 28 of CGST Rules vide Notification
No. 52/2023 dated 26.10.2023, for determining
the taxable value of such supply of services
between related persons in respect of providing
corporate guarantee. Accordingly, consequent
to insertion of the said sub-rule in rule 28 of
CGST Rules, 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 be determined as per
the provisions of the sub-rule (2) of Rule 28 of
CGST Rules, irrespective of whether full ITC
is available to the recipient of services or not.
It is clarified that the sub-rule (2) of Rule 28
shall not apply in respect of the activity of
providing personal guarantee by the Director to
the banks/ financial institutions for securing
credit facilities for their companies and the
same shall be valued in the manner provided in
S. No. (1) above.
3.
It is requested that suitable trade notices may be issued to publicize the contents of
this Circular.
4.
Difficulties, if any, in implementation of this Circular may please be brought to the
notice of the Board. Hindi version would follow.
(Sanjay Mangal)
Principal Commissioner (GST)
