GST on Personal Guarantees By Directors: When Can Tax Liability Arise?

Personal guarantees by directors are common in bank borrowing. Lenders often insist that directors, promoters or key managerial persons stand as guarantors before granting term loans, cash credit limits or other credit facilities to a company.

Under GST, the key issue is not merely whether a guarantee exists. The real question is whether the director receives any fee, commission, remuneration or benefit for giving or continuing the guarantee.

CBIC Circular No. 204/16/2023-GST dated 27 October 2023 clarifies that a personal guarantee given by a director to a bank or financial institution for securing credit facilities of the company is treated as a supply of service. However, where the director does not receive any consideration, the open market value of the service is treated as zero. So, no GST is payable.

Personal Guarantee: Service, But Nil Value

A personal guarantee is an undertaking by an individual to discharge the company’s liability if the company defaults. When a director gives such a guarantee for a company loan, the director supports the company in obtaining credit.

Since a director and the company are related persons under GST law, a guarantee may be treated as a supply even without consideration. But tax is payable only on the value of supply.

CBIC has relied on RBI instructions, under which personal guarantees of directors should not become a source of income. Banks generally require undertakings that no commission, brokerage or other consideration will be paid by the company or received by the guarantor. Therefore, where no amount or benefit is received by the director, the taxable value is treated as nil.

When GST is Not Payable

GST should not arise where:

1. the director gives a personal guarantee for the company’s bank facility;
2. the guarantee is part of normal loan documentation;
3. the company does not pay guarantee commission, brokerage, fee or remuneration;
4. the director does not receive any direct or indirect benefit; and
5. records clearly show that no consideration was paid.

This is the usual case in promoter-led companies. Directors provide guarantees because banks require them, not because the company pays them separately.

When GST Risk Arises

GST risk arises when consideration is paid for giving or continuing the guarantee.

This may happen where the company pays guarantee commission to a director, pays an ex-director to continue an old guarantee, or gives any separate benefit linked to the guarantee. Even if the payment is recorded under another head, tax exposure can arise if the payment is connected with the guarantee.

In such cases, GST would apply on the actual amount or benefit provided to the guarantor.

Personal Guarantee and Corporate Guarantee Must Be Separated

A personal guarantee is given by an individual. A corporate guarantee is given by one company for another company, usually by a holding company for its subsidiary or by a group company for an associate enterprise.

This distinction is important because Rule 28(2) of the CGST Rules deals specifically with corporate guarantees between related persons. It does not apply to personal guarantees by directors.

For corporate guarantees issued or renewed on or after 26 October 2023, Rule 28(2) prescribes valuation at 1% of the guaranteed amount per annum or the actual consideration, whichever is higher, subject to the rule’s proviso. Later clarifications also state that valuation is linked to the amount guaranteed and not merely the loan amount actually disbursed.

Key Case Law

Manappuram Finance Ltd. v. Union of India

The Kerala High Court considered GST on a director’s personal guarantee and loan extension arrangements. The Court noted that the issue was covered in favour of the taxpayer by CBIC Circular No. 204/16/2023-GST and Circular No. 218/12/2024-GST. The ruling supports the position that GST cannot be demanded on a notional value where a director gives a personal guarantee without consideration.

GVK Power and Infra Ltd. v.Union of India

The Telangana High Court issued notice in a writ petition challenging CBIC’s clarification on GST treatment of personal and corporate guarantees. The case shows that the broader legal position on guarantee taxation is still developing.

M/s D P Jain & Co. Infrastructure Pvt. Ltd. v. Union of India

The Bombay High Court, Nagpur Bench, dealt with corporate guarantees issued by the petitioner for loans taken by related project companies. The guarantees were executed between 2020 and 2022, before insertion of Rule 28(2). The guarantee deeds specifically stated that the guarantor had not received and would not receive any security, fee, commission or other consideration from the borrower.

The department issued summons and a show cause notice demanding GST. The Court quashed both. It held that the petitioner was not in the business of providing corporate guarantees and that the guarantees were in-house arrangements to support related entities. Relying on Commissioner of CGST and Central Excise v. Edelweiss Financial Services Ltd., the Court held that where there is no flow of consideration, taxability does not arise. However, the Court refused to strike down Rule 28(2).

This decision is important for pre-Rule 28(2) corporate guarantee disputes, especially where the guarantee deed itself records that no consideration was paid or payable.

In re Green Infra Wind FarmAssets Ltd.

The Rajasthan AAR considered a corporate guarantee issued by overseas shareholders for loans availed by an Indian company. It held that GST under reverse charge was payable only once where the guarantee was issued once for a specified period and was not renewed periodically. The ruling is useful for timing and valuation issues in cross-border corporate guarantee arrangements.

Documentation Checklist

Companies should maintain clear records to show whether any consideration was paid. Useful documents include:

1. bank sanction letter;
2. guarantee deed;
3. board approval for borrowing;
4. undertaking given to the bank;
5. declaration from the director or guarantor that no fee or commission was received;
6. ledger extract showing no payment for the guarantee;
7. loan agreement and related bank documents; and
8. internal GST note recording the tax position.

For corporate guarantees, the guarantee deed should be reviewed carefully. A clause stating that no fee, commission, security or other consideration was received or receivable can be decisive, as seen in D P Jain & Co. Infrastructure.

Conclusion

A director’s personal guarantee may be treated as a supply of service under GST. But GST is not payable merely because the guarantee exists.

Where the director receives no fee, commission, remuneration or benefit, the taxable value is nil and GST should not arise. Where any consideration is paid, directly or indirectly, GST exposure must be examined.

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