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 ofborrowing concerns are paid remuneration/consideration in any manner,directly or indirectly.In all these cases,the taxablevalue 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 insertedin 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.