Applicability of GST on Personal and Corporate Guarantees:

Personal guarantee (offered by directors)

A circular is to be issued to clarify that, when there is no consideration involved for personal guarantee provided by the director to the bank and financial institutions, the open market value of the transaction may be treated as zero and no tax is payable.

Corporate guarantee (provided for related persons)

  • Sub-rule (2) to be inserted in rule 28 of the CGST Rules to provide that the taxable value for the supply of a corporate guarantee service will be higher of 1% of the guarantee offered or the actual consideration.
  • Circular to be issued to clarify that the valuation of corporate guarantee provided between related persons will be governed by proposed rule 28(2) of the CGST Rules irrespective of the input tax credit (ITC) availability to the recipient of the service.

Our Comments

  • Supreme Court decision in case of Edelweiss Financial Services Limited wherein it was held that corporate guarantee services are not liable to service tax in the absence of consideration may not hold good in GST Act due to Serial no. 2 of the Schedule I of the CGST Act (i.e. transaction between relation parties is subject to GST).
  • Let’s wait for the actual circular to be issued in Public Domain to get more clarity on the issue. However, Government has cleared it’s intention to levy GST on Corporate guarantee between related parties.,,

Leave a Comment

Your email address will not be published. Required fields are marked *