The Central Board of Indirect Taxes and Customs (CBIC) has recently issued Circular No. 204/16/2023-GST to provide clarifications on certain issues related to taxability of personal and corporate guarantees under Goods and Services Tax (GST).
CBIC GST Circular 204/16/2023 dated 27/10/2023: Clarifications on Taxability of Personal and Corporate Guarantees
Taxability of Personal Guarantee by Directors
As per the circular, when a director provides a personal guarantee to banks/financial institutions for securing credit facilities for their company without any consideration, it will be treated as a supply of service between related persons under GST, even if made without consideration.
The taxable value of such service shall be the open market value as per Rule 28 of CGST Rules. However, RBI guidelines prohibit payment of any commission or fees to directors for personal guarantees. Hence, the open market value can be treated as zero and no GST will be applicable on such personal guarantees.
Taxability and Valuation of Corporate Guarantees
The circular clarifies that a corporate guarantee provided by one related person to another or by a holding company to its subsidiary, even without consideration, will be treated as a supply of service under GST.
The taxable value of such services will be as per Rule 28 of CGST Rules. A new sub-rule (2) has been inserted in Rule 28 to prescribe a valuation mechanism for such corporate guarantees, based on a percentage of the amount of facility guaranteed.
Conclusion
The circular aims to bring uniformity in implementing provisions related to taxability of guarantees under GST. Companies should evaluate impact of the circular, especially for corporate guarantees between related parties.