Circular No. 204/16/2023 – GST dated 27th October, 2023

Key Pointers –

• As per mandate provided by RBI in terms of Para 2.2.9 (C) of RBI’s Circular No. RBI/2021-22/121 dated 9thNovember, 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.
• 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.
• However, where the guarantee provided by the director is no longer connected with the management, but it is considered essential because the new management's guarantee is either not available or is found inadequate, then 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 guarantee provided by a company to other company, where both the companies are related parties, it shall be treated as supply as per Schedule I of CGST Act, even when made without any consideration.
• Similarly, the activity of providing corporate guarantee by a holding company to its subsidiary company, even when made without any consideration, is also to be treated as a supply of service as per Schedule I of CGST Act. The taxable value will be determined as per rule 28 of CGST Rules, irrespective of whether full ITC is available to the recipient of services or not.