Advisory to Finsys ERP Clients : GST on Corporate Guarantee , GST on personal Guarantee
What is the final position on Corporate Guarantee Fee or Directors Personal Guarantee Fee ?GST to be charged or not ? What to do ? And how to make invoice in your ERP Software ?
Short Summary
Actually, NIL / Zero commission taken for giving Personal Guarantee
- If you are not paying any amount to the Director for such service … Normally it is like this only. No MSME Director takes this fee from his own company.
- Infact, bank sanction letter also usually says so, that you shall give Guarantee… and you shall not charge any commission or fee for the same.
- Then Value of this service for GST will be mandatory taken as ZERO. And thus, the GST on this will be ZERO
Corporate Guarantee to Group companies
- If your 1 company is giving Corporate Guarantee to your group company, associate company or subsidiary company.
- Then, even if you are not paying any amount to the second company for such service …
- Then Value of this service for GST will be mandatory taken as 1%. And thus, the GST on this will be 18% of that 1%.
Example : Calculations for Corporate Guarantee Fees to Group companies
- Main company : ABC Pvt Ltd. Has a standing of 20 years with large profits and large turnover
- New company is DEF Pvt Ltd, It is formed in 2022. Just a new entity. It has applied for Loan of Rs 10 crores with the State Bank of India.
- SBI wants Corporate Guarantee
- so, ABC gives Corporate Guarantees to Bank for DEF for this loan of Rs 10 crores
- So, what is the GST payable ?
- Value of this service for GST will be mandatory taken as 1%. That is 1% of 10 cr = Rs 10 lakh
- And thus, the GST on this will be 18% of that 10 lakhs = Rs 1.80 lakhs.
- Best will be ABC should (a) tell the bankers that you are doing as per this government circular (b) issue a tax invoice for Rs 10 lakhs. Charge GST of 18% on that
- and DEF should book the invoice and take ITC on the same.
- DEF should also deduct TDS as per law.
- there is no net cost, since both get credit of ITC and TDS as applicable.
Source : The Law says as such
ii) 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: 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.
other sources
Note: Safe Harbor Rules issued by CBDT provides that commission or fee would be considered at 1% of amount guaranteed in case of Corporate Guarantee given to wholly owned subsidiary. Similar valuation principle being considered for GST purpose as well.
FAQ1. Going forward what would be the value of taxable supplies of service of provision of corporate guarantee by a company to the bank/financial institutions for providing credit facilities to the other company?
Comments – In case of supply between unrelated parties, the value of supply would be as determined in the invoice, in case raised. However, in case of related persons the value of supply would be 1% of the amount of such guarantee offered, or the actual consideration, whichever is higher.
FAQ2. Would the value as per transfer pricing norms in Income Tax affect GST on provision of corporate guarantees?
Comments – Generally as Transfer pricing norms, the value of corporate guarantees is taken as 0.5%. The same may be treated as ‘open market value’ for periods before Rule 28(2). However, post Rule 28(2), the value determined herein i.e. 1% may be considered for transfer pricing regulations.
6. Since director is also a ‘related person’, is the personal guarantee provided by him/her to the company liable to also be taxed as per Rule 28(2)?
Comments – No. Rule 28(2) shall not apply in respect of the activity of providing personal guarantee by the Director to the banks/ financial institutions for securing credit facilities for their companies and no GST would be chargeable on the said transaction.
7. Whether Personal guarantees provided by directors to the banks/ financial institutions for securing credit facilities for their company is taxable under GST?
Comments – The activity of providing personal guarantee by the Director to the banks/ financial institutions for securing credit facilities for their companies is to be treated as a supply of service, even when made without consideration as per Section 7 and read with Schedule I Entry 2 of The CGST Act 2017. In terms of Rule 28 of CGST Rules, the taxable value of such supply of service shall be the open market value of such supply.
However, as per RBI guidelines, the 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. As such, when no consideration can be paid for the said transaction by the company to the director in any form, directly or indirectly, as per RBI mandate, there is no question of such supply/ transaction having any open market value. 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.
8. Generally banks take the corporate or personal guarantees of a value much higher than the value of the loan. What would be the value of supply for GST purposes in such cases?
Comments – For personal guarantees, the value of supply would be NIL in case they are issued in compliance with RBI guidelines. However, for corporate guarantee cases, the value of supply would be 1% of the amount of such guarantee offered.
9. What about Personal guarantees provided by ex-directors/ KMP to the banks/ financial institutions for securing credit facilities for their companies. Is it taxable under GST?
Comments – In case 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.
However, again to be noted that in case ‘no consideration’ is paid then, even in these circumstances no GST is leviable as they are then not related.
10. What about Personal guarantees provided by director’s relatives to the banks/ financial institutions for securing credit facilities for the companies. Is it taxable under GST?
Comments – In case such person is to be considered as a ‘related party’ as explanation to Section 15 of The CGST Act 2017 and as per mandate provided by RBI in terms of Circular No. RBI/2021-22/121 dated 9th November, 2021, or other regulations, no consideration can be paid to the said persons, directly or indirectly, in lieu of providing personal guarantee to the bank for borrowing credit limits; As such, when no consideration can be paid for the said transaction by the company to the person in any form, directly or indirectly, as per RBI mandate, there is no question of such supply/ transaction having any open market value. 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, incase there is no such mandate by the RBI, then Rule 28(2) may be applicable depending upon the facts of the case.
Details can be seen Vide Notification 52/2023 :” Source : https://blog.saginfotech.com/cbic-central-tax-notification-52-2023-gst-reg-01-opc#:~:text=52%2F2023%20Related%20to%20GST%20REG%2D01%20For%20OPC,-October%2028%2C%202023&text=The%20Central%20Board%20of%20Indirect,a%20%27One%20Person%20Company%27.
How to make such invoice in your Finsys ERP Software :
Make Service bill as usual
(a) Open SAC code, (b) Open 59 series item as a service item (c) Book a Sales order in 41series as a service order, Approve it (d) Make invoice. And make E invoice as applicable.
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