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THE INSIGHT

Guarantees by Directors – whether supply of service?
By CA Raghav Rathi
Nov 09, 2021

IN general business parlance, many a times the banks/financial institutions before granting/sanctioning loan to any company, ask their directors to provide personal guarantee for such loans and advances. In those cases, if the company does not honor the debt taken by it, the same become recoverable from the directors. Such guarantees are provided in the capacity of directors and usually no charges are paid by the company to the director for providing such guarantee.

For this act of 'benevolence' by the Directors towards the company, whether the CGST Act, 2017 have any implication is what this article is all about.

In terms of entry no. 6 of the notification no. 13/2017-C.T. (Rate) dt. 28.06.2017, all the "services" provided by the directors in the capacity of director is chargeable to tax and the company is liable to pay tax under reverse charge mechanism for such services. The primary question here is whether the guarantee provided by the director is a service?

Section 2(52) of the CGST Act, defines 'Goods' and states that it means every kind of movable property. Further, Section 2(102) of the CGST Act defines 'services' and states that anything other than goods is service. It is evident that personal guarantee does not fall within the ambit of 'goods' under GST, since a guarantee is not a movable property, rather, it is incorporeal and on the basis of the judgement passed by Hon'ble Delhi High Court in W.P.(C) 2845/2014 & CM APPL. 5898/2014 in the case of Controls & Switchgear Contactors Limited vs. DCIT = TOG-972-HC-DEL-IT-2014 wherein it was held that the personal guarantee can also be said to be a service,the guarantee provided by the director can fairly be said to be a "service".

GST is leviable only on supply of goods and services. Supply is defined under section 7 of the CGST Act, 2017 which includes all forms of supply of goods or services or both made or agreed to be made for a consideration by a person in the course or furtherance of business. In the case in hand, Guarantee given is a service, it is for the furtherance of business, the consideration although absent, but as per entry 2 of Schedule I, supply between two related person is a supply even in absence of any consideration and as per explanation to section 15 of the CGST Act, 2017, company and its director are related persons, and the guarantee given would be considered as supply even in the absence of consideration.

Therefore,in terms of the supra stated discussion, it can fairly be concluded that the guarantee provided by the directors is a service and is liable to be taxed under reverse charge mechanism.

Here some imperative questions which needs clarification on an urgent basis -

1. Can the director actually claim the remuneration/commission for providing the guarantee?

++ Normally,no charges is either demanded or paid to any directors for such services. Further,clause C of sub-para 2.2.9.1 of para 2.2.9 of RBI Circular No. RBI/2009-10/70 DBOD. No. Dir. BC. 14 /13.03.00/2009-10 July 1, 2009 specifically bar the company's to give consideration, whether by way of commission, brokerage fees or any other form, to any directors. So, ideally if no consideration can be charged by virtue of the supra stated circular, the open market value for such supply under Rule 28 of the CGST Rules, 2017 would be zero and the tax would be calculated considering the taxable value as zero.That is, virtually no tax on such transactions.

2. How the value of consideration for such services would be derived? Can the normal financial bank guarantee charges as charged by Bank(generally approximately 3%) be adopted for arriving at the value for the purpose of payment of GST under rule 28 of the CGST Rules, 2017?

++ Guarantee in the current case is personal in nature (i.e. creating binding effect on the personal assets of the directors). It is well settled law that various guarantees (i.e. bank, personal and corporate) are different in nature and cannot be considered at par. Each guarantee has its own characteristics and nature and are governed under different terms and conditions. Thus, the rates at which the bank provides guarantee cannot be considered as the value for the guarantee provided by directors and, therefore,the open market value for guarantee provided by directors remains open ended.

As the issue is not free from doubt, it is requested that the CBIC throws light on the matter by issuance of a timely clarification.

[The views expressed are strictly personal.]