Taxability of personal guarantee & corporate guarantee

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 has been discussed in the 52nd GST Council.

As per Press Release: 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. clarification is also being sought as to whether the corporate guarantee provided by a holding company to its subsidiary company or by any entity to its related parties, is to be treated as a supply of service or not, and if so what would be the valuation of such supplies.

The Central Board of Indirect Taxes and Customs (CBIC) has said that Goods and Services Tax (GST) will apply to corporate guarantees between related entities such as parent firms and subsidiaries from Thursday, 26 October. The order gives effect to the decision announced by the GST Council on 8 October.

As per the CBIC order, 18% GST will apply to corporate guarantees between parent and subsidiaries and other related parties either on the financial consideration charged by the guarantor for that service, or 1% of the value of the guarantee, whichever is higher.

Experts said that this modification of the GST rule will have no impact on transactions executed prior to 26 October.

The council had also announced that in the case of corporate guarantees issued to a bank by a director against loans sanctioned to a company, and where no fee is paid to the director for that service, no GST would apply.

Experts said that while the rule change is meant to facilitate trade, many other important issues remain open for discussion. For instance, there is no clarity on the periodicity of GST payments on corporate guarantees – monthly, annually, or one-time – said Vivek Baj, partner at Economic Laws Practice, a law firm.

As the new rules takes effective from Thursday, it will be interesting to see how pending disputes unfold, he added. It will also be interesting to see how corporations adapt to the new valuation for future as well as past transactions, Baj said.

Personal guarantees given by directors to banks / financial institutions for corporate borrowings on behalf of company Where company pays consideration to director in any form – directly or indirectly – to be taxed at open market value. Where no consideration is involved – value to be considered as zero and no tax payable.

Source: Live Mint