Important Keyword: F. No. 20/06/22/2023-GST-CBEC, Circular No. 204/16/2023-GST, Section 168 (1) CGST Tax Act 2017, Section 15(a) CGST Act, Section 7(1)(c) CGST Act 2017, Rule 28 CGST Rules 2017, Circular No. RBI/2021-22/121, Notification No. 52/2023.
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F. No. 20/06/22/2023-GST-CBEC
Government of India Ministry of Finance
Department of Revenue
Central Board of Indirect Taxes and Customs GST Policy Wing
*****
New Delhi, Dated the 27th October 2023
Circular No. 204/16/2023 - GST: Clarification on Issues Pertaining to Taxability of Personal Guarantee and Corporate Guarantee in GST.
To,
The Principal Chief Commissioners/ Chief Commissioners/ Principal Commissioners/ Commissioners of Central Tax (All)
The Principal Directors General/ Directors General (All) Madam/Sir,
Subject: Clarification on issues pertaining to taxability of personal guarantee and corporate guarantee in GST-reg.
Representations have been received from the trade and field formations 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 in order to secure credit facilities for its subsidiary company.
2. In order to ensure uniformity in the implementation of the provisions of law across the field formations, the Board, in exercise of its powers conferred by section 168 (1) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “CGST Act”), hereby clarifies the issues as under:
| S. No. | Issue | Clarification |
| 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. | As per Explanation (a) to section 15 of CGST Act, the director and the company are to be treated as related persons. As per clause (c) of sub-section (1) of section 7 of the CGST Act, 2017, read with S. No. 2 of Schedule I of CGST Act, supply of goods or services or both between related persons, when made in the course or furtherance of business, shall be treated as supply even if made without consideration. Accordingly, 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. Rule 28 of Central Goods and Services Tax Rules, 2017 (hereinafter referred to as “CGST Rules”) prescribes the method for 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 CGST 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 managerial personnel or major shareholders for the credit facilities granted to corporates, public or private, only when absolutely warranted after a careful examination of the circumstances of the case and not as a matter of course. In order to identify the circumstances under which the guarantee may or may not be considered necessary, banks should be guided by the following broad considerations: ………………….. C. Worth of the guarantors, payment of guarantee commission, etc Where personal guarantees of directors are warranted, they should bear reasonable proportion to the estimated worth of the person. The system of obtaining guarantees should not be used by the directors and other managerial personnel as a source of income from the company. Banks should obtain an undertaking from the borrowing company as well as the guarantors that no consideration whether by way of commission, brokerage fees or any other form, would be paid by the former or received by the latter, directly or indirectly. This requirement should be incorporated in the bank's terms and conditions for sanctioning of credit limits. During the periodic inspections, the bank's inspectors should verify that this stipulation has been complied with. There may, however, be exceptional cases where payment of remuneration may be permitted e.g. where assisted concerns are not doing well and the existing guarantors are no longer connected with the management, but continuance of their guarantees is considered essential because 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 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. There may, however, be cases where the director, who had provided the guarantee, is no longer connected with the management but continuance of his guarantee is considered essential because the new management's guarantee is either not available or is found inadequate, or there may be other exceptional cases where the promoters, existing directors, other managerial personnel, and shareholders of borrowing concerns are paid remuneration/ consideration in any manner, directly or indirectly. In all these cases, the taxable value of such supply of service shall be the remuneration/ consideration provided to such a person/ guarantor by the company, directly or indirectly. |
| 2. | Whether the activity of providing corporate guarantee by a person on behalf of another related person, or by the holding company for sanction of credit facilities to its subsidiary company, to the bank/ financial institutions, even when made without any consideration will be treated as a taxable supply of service or not, and if taxable, what would be the valuation of such supply of services. | Where the corporate guarantee is provided by a company to the bank/financial institutions for providing credit facilities to the other company, where both the companies are related, the activity is to be treated as a supply of service between related parties as per provisions of Schedule I of CGST 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 CGST Act. In respect of such supply of services by a person to another related person or by a holding company to a subsidiary company, in form of providing corporate guarantee on their behalf to a bank/ financial institution, the taxable value will be determined as per rule 28 of CGST Rules. Considering different practices being followed by the field formations and taxpayers in determining such taxable value, in order to provide uniformity in practices and ease of implementation, sub-rule (2) has been inserted in rule 28 of CGST Rules vide Notification No. 52/2023 dated 26.10.2023, for determining the taxable value of such supply of services between related persons in respect of providing corporate guarantee. Accordingly, consequent to insertion of the said sub-rule in rule 28 of CGST Rules, in all such cases of supply of services by a related person to another person, or by a holding company to a subsidiary company, in the form of providing corporate guarantee on their behalf to a bank/ financial institution, the taxable value of such supply of services, will henceforth be determined as per the provisions of the sub-rule (2) of Rule 28 of CGST Rules, irrespective of whether full ITC is available to the recipient of services or not. It is clarified that the sub-rule (2) of Rule 28 shall not apply in respect of the activity of providing personal guarantee by the Director to the banks/ financial institutions for securing credit facilities for their companies and the same shall be valued in the manner provided in S. No. (1) above. |
3. It is requested that suitable trade notices may be issued to publicize the contents of this Circular.
4. Difficulties, if any, in implementation of this Circular may please be brought to the notice of the Board. Hindi version would follow.
(Sanjay Mangal)
Principal Commissioner (GST)
📚 Frequently Asked Questions (FAQs): Circular No. 204/16/2023 - GST
Q1. What is Circular No. 204/16/2023-GST?
Answer:
Circular No. 204/16/2023-GST clarifies the GST treatment of personal guarantees given by directors and corporate guarantees provided by related companies or holding companies to banks or financial institutions for securing credit facilities. It explains when these guarantees are treated as a supply under GST and how their taxable value should be determined. The clarification was issued to ensure uniform implementation of GST law across the country.
Q2. Is a personal guarantee given by a director to a bank treated as a supply under GST?
Answer:
Yes. A personal guarantee given by a director to secure loans for the company is treated as a supply of service because the director and the company are considered related persons under the CGST Act.
However, this does not automatically mean GST is payable. The tax liability depends on the valuation rules explained in the circular, particularly where no consideration is paid by the company to the director.
Q3. Is GST payable when a director provides a personal guarantee without receiving any consideration?
Answer:
Generally, no. The circular clarifies that where the director does not receive any commission, brokerage, remuneration, or any other consideration for providing the personal guarantee, the open market value may be treated as zero, resulting in a taxable value of zero.
In simple terms, although the activity is treated as a supply between related persons, no GST is payable because the taxable value is considered nil in such cases.
Q4. What happens if a director receives remuneration or commission for giving a personal guarantee?
Answer:
If the company pays any commission, remuneration, brokerage, or indirect benefit to the director for providing the guarantee, GST becomes applicable on the value of that consideration.
Many businesses actually face this issue where directors receive guarantee commissions through separate agreements or indirect arrangements. In such situations, the taxable value will be equal to the remuneration or consideration received by the guarantor.
Q5. Is a corporate guarantee provided by a holding company to its subsidiary taxable under GST?
Answer:
Yes. A corporate guarantee provided by a holding company to a bank on behalf of its subsidiary is treated as a supply of service between related persons, even if no consideration is charged.
This is because a holding company and its subsidiary are related persons under the CGST Act. Accordingly, GST valuation rules apply even where the guarantee is provided without charging a fee.
Q6. How is the value of a corporate guarantee determined under GST?
Answer:
The valuation is governed by Rule 28(2) of the CGST Rules, which was inserted through Notification No. 52/2023-Central Tax dated 26 October 2023.
If you look at it practically, this rule was introduced because businesses and tax authorities were following different valuation methods. The new provision provides a uniform mechanism for valuing corporate guarantees given between related persons.
Q7. Does Rule 28(2) apply to personal guarantees given by directors?
Answer:
No. This is an important distinction made by the circular.
Rule 28(2) applies only to corporate guarantees given between related entities. It does not apply to personal guarantees provided by directors. Personal guarantees continue to be valued based on the principles explained separately in the circular, where the taxable value may be treated as zero if no consideration is received.
Q8. Why did CBIC issue this clarification?
Answer:
The circular was issued because taxpayers and field officers had adopted different interpretations regarding GST on guarantees. Some believed personal guarantees were outside GST, while others applied different valuation methods for corporate guarantees.
The clarification establishes a uniform approach so that businesses, auditors, and GST officers follow the same principles while determining taxability and valuation.
Q9. What should companies maintain to support GST compliance on guarantees?
Answer:
Businesses should maintain board resolutions, loan agreements, guarantee documents, correspondence with banks, and records showing whether any commission or remuneration has been paid to directors or related entities.
Let’s understand this with an example. If a director signs a personal guarantee without receiving any payment, the company should retain documentary evidence demonstrating that no consideration was paid, directly or indirectly. Proper documentation can help during GST audits.
Related Resource:
GST Compliance: https://finodha.in/gst-compliance/
Q10. Does this circular change the GST law?
Answer:
No. The circular does not amend the CGST Act or the CGST Rules.
Instead, it explains how existing provisions relating to Section 7, Section 15, Schedule I, and Rule 28 should be interpreted in the context of personal and corporate guarantees. Its purpose is to ensure consistency and reduce disputes across GST field formations.
Download PDF: Circular No. 204/16/2023 - GST
More Information: https://taxinformation.cbic.gov.in/
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