TaxTMI 
TaxTMI 
Clarification on issues pertaining to taxability of personal guarantee and corporate guarantee in GST
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....epartment of Revenue, GST Policy Wing, Government of India, New Delhi, has issued Circular No. 204/16/2023-GST, dated October 27, 2023 on the recommendations of the GST Council. Hence, following pari materia circular is issued. Representations have been received from the trade and field formations by the GST Council, seeking clarification on certain issues with respect to taxability of activity of providing personal bank guarantee by Directors to banks for securing credit facilities for the company. Similarly, clarifications are being sought with respect to taxability and valuation of the activity of providing corporate guarantee by a related person to banks/financial institutions for another related person, as well as by a holding company....
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....r determining the value of the supply of goods or services or both between related parties, other than where the supply is made through an agent. In terms of rule 28 of TNGST Rules, the taxable value of such supply of service shall be the open market value of such supply. RBI has provided guidelines for obtaining personal guarantee of promoters, directors and other managerial personnel of the borrowing concerns vide Para 2.2.9 of its Circular No. RBI/2021-22/121, dated 9th November, 2021, which is reproduced below : "2.2.9 Guidelines relating to obtaining of personal guarantees of promoters, directors, other managerial personnel, and shareholders of borrowing concerns Banks should take personal guarantees of promoters, directors, other m....
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....cause the new management's guarantee is either not available or is found inadequate………" Accordingly, as per mandate provided by RBI in terms of Para 2.2.9 (C) of RBI's Circular No. RBI/2021-22/121, dated 9th November, 2021, 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. As such, when no consideration can be paid for the said transaction by the company to the director in any form, directly or indirectly, as per RBI mandate, there is no question of such supply/transaction having any open market value. Accordingly, the open market value of the said t....
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.... of service between related parties as per provisions of Schedule I of the TNGST Act, even when made without any consideration. Similarly, where the corporate guarantee is provided by a holding company, for its subsidiary company, those two entities also fall under the category of 'related persons'. Hence the activity of providing corporate guarantee by a holding company to the bank/financial institutions for securing credit facilities for its subsidiary company, even when made without any consideration, is also to be treated as a supply of service by holding company to the subsidiary company, being a related person, as per provisions of Schedule I of the TNGST Act. In respect of such supply of services by a person to another related pers....