Based on the representations received, the Central Board of Indirect Taxes and Customs (CBIC), vide circular no. 204/16/2023-GST issued on 27th October 2023 has issued a clarification on issues pertaining to the 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.
Issue 1: Whether the activity of providing a personal guarantee by the Director of a company to the bank/ financial institutions for sanctioning 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.
The CBIC, after reviewing Explanation (a) to section 15 and clause (c) of sub-section (1) of section 7 of CGST Act with Rule 28 of Central Goods and Services Tax Rules and RBI circular stated that according to RBI’s directive, as outlined in Circular No. RBI/2021-22/121 dated November 9, 2021, no compensation, be it in the form of commission, brokerage fees, or any other form, can be given to a director by the company for providing a personal guarantee to secure credit from a bank. Since no consideration is allowed as per the RBI mandate, there is no open market value for this transaction. Consequently, the taxable value of this service can be considered zero, and no tax is payable for the service provided by the director to the company.
However, there may be exceptions in cases where the director is no longer involved in management but their guarantee is still necessary. In such cases, or in other exceptional situations where remuneration or consideration is provided directly or indirectly to promoters, current directors, managerial personnel, or shareholders of the borrowing entity, the taxable value of the service will be the remuneration or consideration provided to that person or guarantor by the company.
Issue 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.
The board noted that when a corporate guarantee is provided by one company to a bank or financial institution to secure credit facilities for another related company, even if no consideration is involved, it qualifies as a supply of service between related parties as per Schedule I of the CGST Act. Similarly, if a holding company provides a corporate guarantee for its subsidiary company, these entities also fall under the category of “related persons.” Thus, the act of providing a corporate guarantee by a holding company to secure credit for its subsidiary company, even without consideration, is also considered a supply of service by the holding company to the subsidiary, given their related status.
CBIC clarified that for such services provided by one related person to another or by a holding company to its subsidiary in the form of corporate guarantees to a bank or financial institution, the taxable value is determined according to Rule 28 of the CGST Rules. To ensure consistency in practices and ease of implementation, a new sub-rule (2) has been added to Rule 28 of the CGST Rules through Notification No. 52/2023 dated October 26, 2023, specifically for determining the taxable value of such services involving corporate guarantees between related persons.
Accordingly, consequent to the 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 was also clarified that sub-rule (2) of Rule 28 does not apply to the provision of personal guarantees by directors to banks or financial institutions to secure credit for their companies. The valuation method for this scenario is provided under Serial Number (1) above.
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