The Central Board of Indirect Taxes and Customs in India has recently issued Notification 52/2023-Central Tax and Circular 204/16/2023-GST on October 26th and 27th, 2023, respectively. These notifications address the issue of Goods and Services Tax (GST) on personal and corporate guarantees. The purpose of these notifications is to provide clarity on the taxability of personal guarantees offered by directors to banks in relation to credit limits or loans given to a company, as well as the taxability of corporate guarantees provided for related persons, including guarantees provided by a holding company to its subsidiary.
According to the Circular, when a person provides a corporate guarantee on behalf of another related person or when a holding company provides a corporate guarantee for credit facilities to its subsidiary, even if done without any consideration, it will be considered as a taxable supply of service. The taxable value will be determined in accordance with rule 28 of the CGST (Central Goods and Services Tax) Rules. However, it is important to note that sub-rule (2) of Rule 28 does not apply to the activity of providing personal guarantees by directors to banks or financial institutions for securing credit facilities for their companies.
This clarification by the Central Board of Indirect Taxes and Customs aims to bring clarity and ensure consistency in the application of GST on personal and corporate guarantees. It provides a clear framework for the tax treatment of such guarantees, which will help businesses and individuals understand their tax obligations in relation to these transactions.
The issuance of these notifications is a significant development in the field of indirect taxation in India. It highlights the government’s efforts to streamline the GST regime and address any ambiguities or uncertainties that may exist. By providing clear guidelines on the taxability of personal and corporate guarantees, the government is promoting transparency and ensuring that businesses comply with their tax obligations.
The taxability of personal guarantees offered by directors has been a subject of debate and confusion in the past. With this clarification, it is now clear that providing a personal guarantee by a director to a bank or financial institution will not be considered as a taxable supply of service. This will provide relief to directors who often provide personal guarantees to secure credit facilities for their companies.
Similarly, the taxability of corporate guarantees provided for related persons has also been addressed in the Circular. The Circular clarifies that when a person provides a corporate guarantee on behalf of another related person, or when a holding company provides a corporate guarantee for credit facilities to its subsidiary, it will be treated as a taxable supply of service. This means that GST will be applicable on such transactions, and the taxable value will be determined as per rule 28 of the CGST Rules.
Overall, these notifications provide much-needed clarity on the taxability of personal and corporate guarantees under the GST regime. They bring consistency and transparency to the treatment of such guarantees and help businesses and individuals understand their tax obligations in relation to these transactions. The government’s efforts to streamline the GST regime and address any ambiguities or uncertainties are commendable, as they contribute to a more efficient and effective indirect tax system in India.
In conclusion, the issuance of Notification 52/2023-Central Tax and Circular 204/16/2023-GST by the Central Board of Indirect Taxes and Customs is a significant step towards ensuring clarity and consistency in the application of GST on personal and corporate guarantees. These notifications provide clear guidelines on the tax treatment of such guarantees and help businesses and individuals understand their tax obligations. This development highlights the government’s commitment to streamlining the GST regime and promoting transparency in the indirect tax system.
