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In a move towards fostering clarity and uniformity, the Board, empowered by section164(1) and section 168(1) of the Central Goods and Services Tax Act, 2017 (“CGST Act”), has issued comprehensive clarifications on the intricate matter of taxability concerning personal and corporate guarantees under GST regulations. {Sub-rule (2) in Rule 28 of the Central Goods and Services Tax Rules, 2017 vide Notification No. 52/2023 – Central Tax dated 26th October,2023 and (“NN 52/2023”) and Circular 204/16/2023-GGST dated 27th October,2023}

Personal Guarantees by Directors: Decoding the Clarifications

Issue: The pivotal question of whether providing a personal guarantee by a Director to a bank/ financial institution for credit facilities without any consideration qualifies as a supply of service and attracts GST.

Clarification: According to Explanation (a) to section 15 of the CGST Act, directors and companies are deemed related persons.  Even in the absence of consideration, the supply of goods or services between related persons, in the course or furtherance of business, is considered a supply {per section 7(1)(c) of CGST Act read with S. No. 2 of Schedule I to the CGST Act}.  Consequently, providing a personal guarantee by a Director to banks for securing credit facilities is treated as a supply of service.

Taxable Value: Rule 28 of the Central Goods and Services Tax Rules, 2017, guides the determination of the taxable value of such supplies between related parties.  The open market value becomes the taxable value in such instance.  Notably, the RBI guidelines prohibit any consideration (commission, brokerage fees, or otherwise) to be paid to the director by the company for providing a personal guarantee.  Hence, if no consideration is exchanged, the open market value, and consequently the taxable value, is zero, resulting in no GST liability.

However, exceptional cases may arise, such as when the director is no longer connected with the management but their continuing guarantee is deemed essential. In such instances, where remuneration or consideration is paid, the taxable value becomes the remuneration provided by the company to the director directly/ indirectly.

Corporate Guarantees by Related Persons: Navigating the Complexity

Issue: Whether providing a corporate guarantee without consideration by a person for another related person, or by a holding company for its subsidiary, qualifies as a taxable supply of service, and if so, how to determine the valuation.

Clarification: When a company provides a corporate guarantee to a bank for credit facilities to another related company or when a holding company provides a corporate guarantee for its subsidiary, it constitutes a supply of service between related persons under Schedule I of the CGST Act, even without consideration.

Taxable Value: The determination of the taxable value follows Rule 28 of CGST Rules.  To ensure uniformity and ease of implementation, sub-rule (2) has been inserted in Rule 28 through NN 52/2023. This sub-rule mandates that the taxable value of such supplies between related persons will be determined as per its provisions, irrespective of whether full Input Tax Credit (ITC) is available to the recipient or not.  As per the above-mentioned rule, the value of supply of service with respect to a related person by way of providing corporate guarantee to any banking company or financial institution on behalf of the said related person, is to be deemed to be the higher of the following amounts:

• 1% of the amount of such guarantee offered, or
• Actual consideration

It is important to note that sub-rule (2) of Rule 28 does not apply to personal guarantees by directors, and their valuation should follow the method outlined in point 1 above.

Conclusion: Charting a Clear Course Forward

As businesses engage in financial transactions involving personal and corporate guarantees, these clarifications provide a roadmap for GST compliance.  Uniformity in implementation and adherence to these guidelines will be crucial to navigating the nuanced landscape of taxability in such transactions.

In unraveling the complexity surrounding the taxability of guarantees, these clarifications aim to foster transparency, consistency and a clearer understanding for businesses and field formations alike.