CBIC Circular No. 204/16/2023 Dated. 27 October 2023
CBIC Circular 204/16/2023 (GST): The trade and field formations have recently reached out with questions regarding the tax implications of providing personal bank guarantees by Directors to secure credit facilities for their company.
Additionally, there have been inquiries about the taxation and valuation of providing corporate guarantees by related parties to banks or financial institutions on behalf of other related entities, as well as by a holding company to secure credit facilities for its subsidiary.
In response to this, the Central Board of Indirect Taxes and Customs (CBIC) issued this circular for providing the following clarifications.
1. Clarification on Taxability of Personal Guarantee
In line with Explanation (a) to section 15 of the CGST Act, it’s important to note that directors and their companies are considered related persons. As per clause (c) of sub-section (1) of section 7 of the CGST Act, 2017, along with Schedule I of CGST Act, any supply of goods or services between related parties, in the course or furtherance of business, is treated as a supply, even if no consideration is involved. Therefore, when a director provides a personal guarantee to banks or financial institutions to secure credit facilities for their respective companies, it qualifies as a supply of service, even when done without consideration.
Rule 28 of Central Goods and Services Tax Rules, 2017, specifies the method for determining the value of such supplies between related parties, except when the supply is made through an agent. According to Rule 28, the taxable value of this service supply is equivalent to the open market value of the service.
The Reserve Bank of India (RBI) has issued guidelines pertaining to obtaining personal guarantees from promoters, directors, managerial personnel, and shareholders of borrowing concerns. These guidelines, outlined in Para 2.2.9 of RBI’s Circular No. RBI/2021-22/121 dated 9 November 2021, highlight the need for personal guarantees to be granted in specific situations, with a keen assessment of the case’s circumstances. It is essential that personal guarantees are not used as a source of income from the company. Moreover, the borrowing company and guarantors must confirm that no consideration, such as commission or brokerage fees, will be paid directly or indirectly.
Consequently, in adherence to the RBI’s mandate as per Para 2.2.9 (C) of RBI’s Circular No. RBI/2021-22/121 dated 9 November 2021, no consideration can be given to the director by the company, directly or indirectly, in exchange for providing a personal guarantee to secure credit limits. As there is no provision for consideration, the open market value of this service can be considered as zero, resulting in a taxable value of zero.
In such a scenario, no tax liability arises for the director or the company regarding this supply of service. However, there may be exceptional cases where the director who provided the guarantee is no longer connected with the management, or other situations where remuneration or consideration is paid to promoters, existing directors, managerial personnel, or shareholders of borrowing concerns. In such instances, the taxable value of this service is the remuneration or consideration provided by the company, either directly or indirectly.
2. Clarification on Taxability of Corporate Guarantee
When a company provides a corporate guarantee to a bank or financial institution to secure credit facilities for another related company, even without any consideration, this action is considered a supply of service between related parties as per the provisions outlined in Schedule I of the CGST Act.
Similarly, if a holding company extends a corporate guarantee on behalf of its subsidiary company to secure credit facilities, both entities fall under the ‘related persons’ category. Hence, the act of a holding company providing a corporate guarantee to a bank or financial institution for its subsidiary company, even when done without any consideration, is also treated as a supply of service from the holding company to the subsidiary company, being related entities as per Schedule I of the CGST Act.
In the case of such service supply from one person to another related person or from a holding company to its subsidiary, in the form of offering a corporate guarantee to a bank or financial institution, the taxable value is determined according to Rule 28 of the CGST Rules. To establish consistency and ease of implementation, sub-rule (2) has been introduced in Rule 28 of the CGST Rules through Notification No. 52/2023 dated 26.10.2023. This sub-rule governs the determination of the taxable value for such service supplies between related persons concerning the provision of corporate guarantees.
As a result of the inclusion of this sub-rule in Rule 28 of the CGST Rules, in all instances where a related person provides a service to another person or where a holding company offers a corporate guarantee on behalf of its subsidiary company to a bank or financial institution, the taxable value of this service supply will be determined in accordance with the provisions of sub-rule (2) of Rule 28 of the CGST Rules ( i.e., one per cent of the amount of the guarantee offered or the actual consideration, whichever is higher). This determination applies regardless of whether the recipient of the services can claim the full input tax credit (ITC) or not.
To Read & Download the CBIC Circular 204/16/2023 CLICK HERE
To Read & Download the CBIC Circular 203/15/2023 CLICK HERE
To Read & Download the CBIC Circular 202/14/2023 CLICK HERE
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