In corporates, it is quite common to offer personal guarantees to bank by Directors for loans sought by companies or corporate guarantee given by Parent company for loans sought by its subsidiaries. Taxation of GST on such guarantees has been a burning issue as several companies in past has been subjected to GST notices for this. 

Now the GST Council in its 52nd meeting held on 07th Oct 2023 has clarified and proposed certain amendments related to Bank Guarantees given by Directors or Corporates to bank against credit limits or loans. The press release states the following rules.

Clarifications regarding taxability of personal guarantee offered by directors to the bank against the credit limits/loans being sanctioned to the company and regarding taxability of corporate guarantee provided for related persons including corporate guarantee provided by holding company to its subsidiary company: The Council has inter alia recommended to: 

(a) issue a circular clarifying that when no consideration is paid by the company to the director in any form, directly or indirectly, for providing personal guarantee to the bank/ financial institutes on their behalf, the open market value of the said transaction/ supply 

may be treated as zero and hence, no tax to be payable in respect of such supply of services.

(b) to insert sub-rule (2) in Rule 28 of CGST Rules, 2017, to provide for taxable value of supply of corporate guarantee provided between related parties as one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher.

(c) to clarify through the circular that after the insertion of the said sub-rule, the value of such supply of services of corporate guarantee provided between related parties would be governed by the proposed sub-rule (2) of rule 28 of CGST Rules, 2017, irrespective of whether full ITC is available to the recipient of services or not.

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