Clarification on the taxability of personal guarantee and corporate guarantee in GST –
Circular No 204/16/2023-GST dated October 27, 2023
CBIC has recently issued a circular clarifying the taxability of two issues of personal guarantee and corporate guarantee for credit facilities given by banks and financial institutions.
1. Personal Guarantee by Director:
Whether the same is Supply of Service:
The circular clarifies that providing a personal guarantee by a director to a bank for securing credit facilities for their company will be considered as a supply of service under the scope of GST. Even if there is no actual flow of consideration, the same will fall under the definition of supply between related persons as per the CGST Act.
Valuation of Services:
As per Rule 28 of CGST Rules, the taxable value of the supply of service between related parties shall be the open market value of such supply. The market value of these services has to be determined as per guidelines provided by the Reserve Bank of India. However, the RBI guidelines require that such acts of providing personal guarantees by the directors and other managerial personnel should not result in any kind of monetary consideration/income to be received by such persons from the Company. RBI requires Banks to obtain an undertaking from the company that there is no flow of any consideration to the directors by whatever name called (directly or indirectly) and the same should form part of the Bank’s Terms & Conditions of sanction letter. Since the consideration is straight away prohibited by the RBI, the market value of the same will be zero, and accordingly no tax is applicable for this service provided by the director.
In exceptional cases, where the director who has provided the guarantee is not part of the management anymore due to any reason but the guarantee given to the bank continues because of some reasons like the new management is unable to replace the guarantee or their new guarantees are still insufficient to cover the credit facilities as per the bank’s policies. In such cases, the taxable value of such supply of service shall be the remuneration/ consideration (directly or indirectly) provided to such a person/ guarantor by the company.
2. Corporate Guarantee by Related Persons or Holding Company:
What is covered:
If a company provides a corporate guarantee to a bank for availing credit facilities for any of its related companies, or by a holding company to secure credit facilities for its subsidiary, the same will be treated as a taxable supply of service.
Valuation of Services:
For the Valuation of such services, a new sub-rule (2) has been inserted in rule 28 of CGST Rules vide Notification No. 52/2023 dated 26.10.2023. As per this rule, the taxable value of the supply of such a corporate guarantee shall be one percent of the value of the corporate guarantee or the actual consideration paid by such related party to the guarantor company, whichever is higher. It is irrespective of the fact, whether the full ITC is available to the recipient company or not. For if the consideration is less than one percent of the corporate guarantee, then in that case the taxable value of the service will be one percent of the corporate guarantee even though the recipient will be eligible to claim the ITC on the actual consideration paid only..
The issuance of this circular by CBIC effectively clarifies the issues about taxability and valuation of Corporate and personal guarantees provided by the related persons in respect of credit facilities taken by the companies.