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Circular No. 204/16/2023-GST
F.No. 20/06/22/2023-GST-CBEC
Circular Date: 27th Oct 2023
Issue 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?
Clarification:
As per Sec. 7(1) clause (c) of CGST Act, 2017, read with S. No. 2 of Schedule I of CGST Act, 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.
However, Rule 28 of CGST Rules, 2017 prescribes that the taxable value of such supply of services between related parties shall be Open Market Value of such supply.
It is pertinent to note that as per RBI Circular No. RBI/2021-22/121 dated 9th November, 2021, Para 2.2.9(C), 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.
Conclusion: 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.
However, there may be scenarios where a Director is no longer connected with the Management of the Company and continuance of the Guarantee is considered essential because New Management’s guarantee is either not available or is found inadequate, in all such cases, the taxable value of such supply of service shall be the remuneration consideration provided to such a person by the company director or indirectly.
Issue 2 (read with Notification no. 52/2023 dated 26.10.2023):
Whether the activity of providing Corporate Guarantee by a person on behalf of another related person or by the Holding Company for sanctioning of credit facilities to its subsidiary company, to the bank or financial institutions, even when made without any consideration will be treated as a supply of service or not and whether the same will attract GST or not?
Clarification:
As per Sec. 7(1) clause (c) of CGST Act, 2017, read with S. No. 2 of Schedule I of CGST Act, the activity of providing Corporate Guarantee by the Holding Company for sanctioning of Credit Facilities to its subsidiary company (where both the companies are related), to the banks/ financial institutions is to be treated as a supply of service, even when made without consideration.
However, Rule 28 of CGST Rules, 2017 prescribes that the taxable value of such supply of services between related parties shall be Open Market Value of such supply.
As per Sub-Rule 2 of Rule 28 of CGST Rules, 2017 (inserted vide notification no. 52/2023 dated 26.10.2023), the value of such supply of service shall be as follows –
“Value of supply of services by a supplier to a recipient who is a related person, by way of providing corporate guarantee to any banking company or financial institution on behalf of the said recipient, shall be deemed to be ONE percent of the amount of such guarantee offered, or the actual consideration, whichever is higher.
Conclusion: Accordingly, in case of Corporate Guarantee provided by a Holding Company, for Credit Facilities to its Subsidiary Company, to the Bank or Financial Institution, the value of such supply of service shall be computed as 1% of the amount of such Corporate Guarantee offered or actual consideration, whichever is higher.
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