Remuneration to a director for providing corporate guarantee to be taxed under GST - CBIC
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Remuneration or consideration received, directly/indirectly by a serving or separated director, for providing corporate guarantee will be treated as taxable value for GST, the Central Board of Indirect Taxes & Customs (CBIC) has said. This is part of a clarificatory circular, sent by CBIC to its field formations, for implementation of GST Council’s recommendations pertaining to taxability of personal guarantee and corporate guarantee.
The Council, in its meeting on October 6, gave two recommendations on corporate guarantee. One, the parent company’s corporate guarantee to its subsidiary for a bank loan will attract 18 per cent GST. And second, there will be no GST if a director provides a personal guarantee for a loan from a bank or any financial institution to his/her own company.
Now, CBIC has said that in response to representations received from its own officials and industry, it is issuing clarification to ensure uniformity in implementation. The circular recognized the mandate provided by a RBI circular which says 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 a personal guarantee to the bank for borrowing credit limits. Since there is no consideration, the open market value may be treated as zero and therefore no tax liability.
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,” the circular said.
Further, the circular has envisaged two more scenarios. One is when the corporate guarantee is provided by a company to the bank/financial institutions for providing credit facilities to the other company and where both the companies are related. In such a situation, the activity is to be treated as a supply of service between related parties as per GST Law even when made without any consideration.
Second, 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.
The circular said, that considering different practices being followed by tax officials and taxpayers in determining taxable value, a new provision has been added in CGST Rules (with effect from October 26, 2023). This says: ”The value of supply of services by a supplier to a recipient who is a related person, by way of providing a corporate guarantee to any banking company or financial institution on behalf of the said recipient, shall be deemed to be one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher.” This means if the corporate guarantee was ?100 crore, then ?18 lakh would be the GST liability.
The Council, in its meeting on October 6, gave two recommendations on corporate guarantee. One, the parent company’s corporate guarantee to its subsidiary for a bank loan will attract 18 per cent GST. And second, there will be no GST if a director provides a personal guarantee for a loan from a bank or any financial institution to his/her own company.
Now, CBIC has said that in response to representations received from its own officials and industry, it is issuing clarification to ensure uniformity in implementation. The circular recognized the mandate provided by a RBI circular which says 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 a personal guarantee to the bank for borrowing credit limits. Since there is no consideration, the open market value may be treated as zero and therefore no tax liability.
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,” the circular said.
Further, the circular has envisaged two more scenarios. One is when the corporate guarantee is provided by a company to the bank/financial institutions for providing credit facilities to the other company and where both the companies are related. In such a situation, the activity is to be treated as a supply of service between related parties as per GST Law even when made without any consideration.
Second, 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.
The circular said, that considering different practices being followed by tax officials and taxpayers in determining taxable value, a new provision has been added in CGST Rules (with effect from October 26, 2023). This says: ”The value of supply of services by a supplier to a recipient who is a related person, by way of providing a corporate guarantee to any banking company or financial institution on behalf of the said recipient, shall be deemed to be one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher.” This means if the corporate guarantee was ?100 crore, then ?18 lakh would be the GST liability.
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