Taxability of Personal Guarantee by Director and Corporate Guarantee for Related parties & for Subsidiary Company

Last updated: 12 October 2023

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The 52nd GST Council meeting has provided crucial clarifications on the taxability of guarantees. For personal guarantees given by directors, if no consideration is received, the service value is considered zero, and no tax is payable. However, if any consideration is received, it's taxable at 18%. For corporate guarantees provided by holding companies to subsidiaries or related parties, if consideration is received, tax at 18% is payable on either 1% of the guarantee amount or the actual consideration, whichever is higher.

The GST Council in 52nd GST Council meeting, has inter-alia recommended to issue the circular with regards to the below points:-

1. Clarifications regarding taxability of personal guarantee offered by directors to the bank against the credit limits/loans being sanctioned to the company

GST on Director and Corporate Guarantees: Key Clarifications

Consideration received by the Director from the company	Consideration Condition	Recommendation	GST Implication
NO	in any form, directly or indirectly, for providing personal guarantee to the bank/financials institution on their behalf	Consideration value for the said supply/value in the open market may be treated as "Zero".	No tax to be payable in respect of such supply of services
YES	in any form, directly or indirectly, for providing personal guarantee to the bank/financials institution on their behalf	Consideration value for the said supply/value in the open market may be treated as "Taxable value".	Tax @ 18% to be payable in respect of such supply of services

2. Clarifications regarding taxability of corporate guarantee provided for related persons including corporate guarantee provided by holding company to its subsidiary company

Consideration received by the Holding company from the subsidiary company and Related parties**	Consideration Condition	Recommendation	GST Implication
NO	in any form, directly or indirectly, for providing guarantee to the bank/financials institution on their behalf.	Consideration value for the said supply/value may be 1% of the guarantee amount.	Tax @ 18% to be payable on the taxable value i.e. 1% of the guarantee amount.
YES	in any form, directly or indirectly, for providing guarantee to the bank/financials institution on their behalf.	Consideration value for the said supply/value may be 1% of the guarantee amount or Actual consideration, whichever is higher.	Tax @ 18% to be payable on the taxable value i.e. 1% of the guarantee amount or Actual consideration, whichever is higher.
Related Parties under GST** Related persons are defined u/s 2(84) of the GST Act. Persons shall be deemed to be related if they fall under any of the categories below:- Officer or director of one business is the officer/ director of another business Businesses legally recognised as partners An employer and an employee Any person who holds at least 25% of shares in another company, either directly or indirectly One of them controls the other directly or indirectly They are under common control or management The entities together control another entity The promoters or managerial persons are members of the same family Persons include a legal person who can be individuals, HUF, company, firm, LLP, co-operative society, a body of individuals, local authority, government, or an artificial juridical person. It also includes entities incorporated outside India. Persons who are associated with one another's business or is a sole agent or sole distributor or sole concessionaire shall be deemed to be related.