Clarification on issues pertaining to taxability of personal guarantee and corporate guarantee in GST

Circular No.: 204/16/2023-GST
Date of Circular: 27th October 2023
Relevant Sections and Rules:

• CGST Act, 2017:
  • Section 7(1)(c) and Schedule I (Sl. No. 2): Supply between related persons even without consideration
  • Section 15 and Explanation (a): Valuation and relationship provisions
  • Section 168(1): Power to issue instructions
• CGST Rules, 2017:
  • Rule 28 and newly inserted Rule 28(2) (vide Notification No. 52/2023-CT dated 26.10.2023)
• RBI Circular: No. RBI/2021-22/121 dated 09.11.2021 – Para 2.2.9 (regulations on personal guarantees)

Summary of Clarifications Provided:

1. Personal Guarantee by Director to Bank Without Consideration:

• The director and the company are related persons as per Section 15 Explanation (a).
• As per Schedule I, any supply between related persons in course or furtherance of business is deemed a supply even without consideration.
• Hence, providing personal guarantee by the director to a bank/financial institution on behalf of the company is considered a supply of service under GST.
• Valuation: RBI mandates that no consideration or fee is to be paid to the director for such guarantees. Therefore, open market value is treated as zero, and accordingly, no GST is payable.
• Exception: If in rare cases consideration is paid to the director (directly or indirectly), the remuneration is the taxable value, and GST applies on such amount.

2. Corporate Guarantee Between Related Parties (Including Holding–Subsidiary):

• When a corporate guarantee is provided between related persons, such as:
  • A company providing guarantee for another related company, or
  • A holding company providing guarantee to a bank for securing credit for its subsidiary,

this is considered a supply of service, even if made without consideration, as per Schedule I.

• Valuation:
  • Earlier governed by Rule 28 of CGST Rules.
  • To ensure consistency, new sub-rule (2) to Rule 28 (inserted via Notification No. 52/2023) specifies valuation of corporate guarantees between related persons.
  • This valuation method applies uniformly regardless of whether the recipient avails full ITC or not.
  • Note: This rule does not apply to personal guarantees by directors—those are covered under point 1 above.

Source: Circular No.: 204/16/2023-GST