Introduction:
In the ever-evolving landscape of Goods and Services Tax (GST) regulations, Circular No. 204/16/2023-GST, dated 27th October 2023, issued by the Government of India through the Ministry of Finance’s Department of Revenue, sheds light on critical aspects concerning the taxability of personal guarantees and corporate guarantees under GST. This blog post aims to decode and simplify the key points outlined in the circular for better understanding.
Personal Guarantees: A Taxable Supply
The first issue addressed in the circular revolves around the provision of personal guarantees by directors to banks for securing credit facilities for their companies. According to the circular:
Clarification (Issue 1): Providing personal guarantees by directors to banks without any consideration is deemed a supply of service. The relationship between directors and the company qualifies them as related persons under the CGST Act. Even without consideration, this supply is subject to GST as per Schedule I of the CGST Act.
Taxable Value Determination: The circular refers to Rule 28 of the Central Goods and Services Tax Rules, 2017, which prescribes the method for determining the value of supply between related parties. However, in cases where no consideration can be paid, directly or indirectly, to the director, as mandated by the Reserve Bank of India (RBI), the open market value is considered zero. Consequently, the taxable value of the supply is also zero, and no GST is payable.
Exceptions: Exceptions may arise if the director providing the guarantee is no longer connected with the management, or in cases where remuneration is paid to the guarantor. In such instances, the taxable value would be the remuneration or consideration provided, directly or indirectly, to the guarantor.
Corporate Guarantees: Understanding Taxable Supplies
The second issue delves into the taxability of providing corporate guarantees by related persons or holding companies for credit facilities to their subsidiaries. The circular provides the following insights:
Clarification (Issue 2): Offering corporate guarantees, even without consideration, by a related person or a holding company to secure credit facilities for another related person or subsidiary company is considered a taxable supply of service under Schedule I of the CGST Act.
Taxable Value Determination: Rule 28 of the CGST Rules plays a crucial role in determining the taxable value for such supplies. Acknowledging the varied practices followed in the field, a new sub-rule (2) has been introduced in Rule 28 via Notification No. 52/2023. This sub-rule, applicable to related persons providing corporate guarantees, aims to bring uniformity in practices. The taxable value will now be determined in accordance with the provisions of sub-rule (2) of Rule 28, irrespective of the availability of Input Tax Credit (ITC) to the recipient.
Distinct Valuation for Personal Guarantees: It’s essential to note that the introduced sub-rule (2) of Rule 28 does not apply to personal guarantees provided by directors. The valuation of such guarantees remains in line with the method outlined in Issue 1.
Conclusion:
In conclusion, Circular No. 204/16/2023-GST provides much-needed clarity on the tax implications surrounding personal and corporate guarantees under GST. Understanding the nuances of taxable supplies, valuation methods, and exceptions outlined in the circular is crucial for businesses and taxpayers to ensure compliance with GST regulations. As the GST landscape continues to evolve, staying informed about such circulars becomes imperative for a seamless and compliant business environment. This blog serves as a comprehensive guide to decoding the intricacies of Circular No. 204/16/2023-GST, helping businesses navigate the complexities of GST in India.
