GST on Personel Gurantee provided by Directors to company for taking Loans, Goods and Services Tax - GST

[deepak gulati]

Dear Experts

What is your view on RCM payment on personnel guarantee provided by the Directors of the Company for taking Loan, I have seen Showcase on one whats app group on this service.

Posts / Replies

[Padmanathan Kollengode]

When alleging taxability, the onus is on the department to establish that an activity is taxable supply.

Therefore, kindly post the operative part of the Show cause notice alleging the taxability of personal guarantee so that I can share my view on the same.

[KASTURI SETHI]

The department is issuing show cause notice on the basis of the Department of Economic Affair's instructions for taxable value in such cases.. . These instructions must have been mentioned in the SCN itself.

[KASTURI SETHI]

I agree with Sh.Padmanathan Kollengode Ji. The department has basis. The SCNs are being issued through out India.

The querist is requested to either copy and paste or type & post major contents of the SCN in steading of giving web link.

[Ganeshan Kalyani]

The contention of the GST authorities is that the corporate guarantee given by the holding company is a free supply between related parties and falls within the ambit of a taxable ‘schedule-I’ transaction.

[Padmanathan Kollengode]

Dear experts and querist,

while I am still working on taxability angle and yet to reach a conclusion, what is intriguing me assuming that it is taxable, what will be the time of supply of such personal guarantee?

[deepak gulati]

4. Further, during the course of audit, it has been observed that Directors of the company have rendered their personal guarantee towards credit facilities of Rs. 675.20 Lakh (details in RUD-3). It has been noted that the activity of providing personal guarantee also falls in the category of activity done in the course or furtherance of the business and covered under the definition of supply and hence, is chargeable to GST. In terms of Notification No. 13/2017-Central Tax (Rate), dated 28.6.2017 (as amended), as per S. No. 6 of the said notification, a company or a body corporate located in the taxable territory is liable to pay GST on RCM basis on services received from its directors under RCM as per the provisions of Section 9(3) of the CGST Act, 2017.

4.(i) Extracts of Section 9(3) of the CGST Act, 2017 are reproduced below: -

“Section 9. (1) Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.

(2)…. …… …..

(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

(4)…….

(5)….. ….. …”

4.(ii). Section 9(3) of the CGST Act, 2017, empowers the Govt. to notify the categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of the Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

4.(iii) Under the provisions of Section 9(3) of the CGST/Punjab GST Act, 2017, Notification No. 13/2017, ibid was issued wherein ‘services supplied by a director of a company or a body corporate to the said company or the body corporate’ has been made taxable under RCM. Relevant portion of Notification No. 13/2017-Central Tax (Rate), dated 28-6-2017 is reproduced below: -

SI.No.	Category of Supply of Services	Supplier of service	Recipient of Service
1	2	3	4
6.	Services supplied by a director of a company or a body corporate to the said company or the body corporate	A director of a company or a body corporate	The company or a body corporate located in the taxable territory.

4.(iv) Further, as per Section 7 of the CGST Act, 2017, supply 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. Further, the definition of supply in Section 7(1)(c) of the CGST Act, 2017 also includes the activities that have been specified in Schedule I, even if those services are supplied without a consideration. Entry 2 of the said Schedule I includes the supply of goods or services or both between two or more ‘related persons’, when it is made in the course of furtherance of business.

4.(v) The term ‘related persons’ has been defined in the explanation to Section 15 of the CGST Act. The definition provides for various relationships in which the persons involved would be considered as ‘related persons’, and one of these also includes the situation where the persons are employer and employee. Thus, the Company and its directors are related persons as per the GST law. The term ‘Business’ is defined under Section 2(17) of the CGST Act, 2017. The inclusive definition of the term ‘Business’ covers services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation. Thus, the guarantee provided by the directors, is done in the course of furtherance of business of the Company. Hence, the transaction qualifies as ‘supply’ even when done without consideration. As per the provisions of section 7(1)(c) read with para 2 of Schedule-I of CGST Act, 2017 supply of services between related persons or between distinct persons as specified in Section 25 shall be treated Supply even if made without consideration. Hence, the transaction of providing guarantee by directors to banks for the Company is taxable transaction even if it is given without consideration.

4.(vi) Further, as per Rule 28 of the CGST Rules, 2017, value of supply of services between distinct or related persons will be the open market value of such supply. The Government Guarantee Policy issued by Department of Economic Affairs, Ministry of Finance, Government of India under F. No. 12(15)-B(SD)/2005 dated 22.09.2010 provides the uniform rates of guarantee fee to be collected in respect of internal borrowings, inter alia, @1% per annum on borrowings by Public Sector Enterprises including the Cooperative Sector, and @ 2.5% on borrowings by other sectors. Thus, the Guarantee Value in respect of personal guarantees given by the Directors will be 2.5% of the loans sanctioned by the Banks/ Financial Institutions.

4.(vii) Thus, by adopting the Rule 28 of the CGST Rules, 2017, the taxable value of the guarantee fee in respect of guarantee provided by directors comes to Rs. 16,88,000/- (Rs. 6,75,20,000/- x 2.5%) on which GST amounting to Rs. 3,03,840/-(CGST of Rs. 1,51,920/- + SGST of Rs. 1,51,920/-) appears to be recoverable under RCM under 74 of CGST Act, 2017 read with Section 9 (3) of CGST Act, 2017 and relevant provisions of SGST Act, 2017.

Non-payment of GST on Director/Personal Guarantee (Amount in Rs.)
Bank Loan/Credit Amount	Taxable Value @2.5% of the Loan/Credit	GST payable @18%	Remarks
1	2	3	4
Rs. 6,75,20,000	Rs. 16,88,000	Rs. 3,03,840	CGST Rs. 151920 + SGST Rs. 151920

4.(viii) As per provisions of Section 74 of ‘CGST Act, 2017’, where any tax has not been paid or short paid or erroneously refunded by reason of suppression of facts to evade tax, the proper officer shall serve notice on the person chargeable with tax which has not been so paid or who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under Section 50 of ‘CGST Act, 2017’ and a penalty equivalent to the tax specified in the notice.

Further the meaning of word ‘suppression’ for the purpose of ‘CGST Act 2017’ has been given in ‘Explanation 2’ included in Section 74 of ‘CGST Act 2017’. The same reads as under; -

“Explanation 2 For the purposes of this Act, the expression “suppression” shall mean non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made there under, or failure to furnish any information on being asked for, in writing, by the proper officer.”

4.(ix) The Noticee in terms of Section 39 of ‘CGST Act, 2017’ read with Rule 61 of ‘CGST Rules 2017’ were required to declare the (deemed) value of ‘said services’ (Services supplied by a director of a company or a body corporate to the said company or the body corporate), i.e. taxable value of Rs. 16,88,000/- and tax payable thereon in the respective GSTR-3B Returns. It has been found that declaration of this fact has not been made by the Noticee in the respective GSTR-3B Returns for corresponding period. It appears that such non-declaration falls within the meaning of expression ‘suppression’ for the purposes of ‘CGST Act, 2017’, as provided in Explanation 2 to Section 74 of CGST Act, 2017’.

4.(x) In view of the foregoing Paras, it appears that the Noticee has deliberately and wilfully did not pay GST under RCM basis as per provisions of Section 9(3) of CGST Act 2017. It appears that the Noticee have wilfully contravened the provisions of CGST Act, 2017 and Rules made there under, with an intention to evade payment of tax. Had the audit of the records of the Noticee not been conducted these contraventions would not have come to the notice of the department. As such, the provisions of Section 74 of the CGST Act, 2017 appears to be invokable for demand of tax along with interest under Section 50 of the CGST Act, 2017 and corresponding State Tax Act. The Noticee also appears to be liable for penal action under Section 74 read with 122(1)(i) and Section 122(2)(b) of the CGST Act, 2017 for wilful suppression of facts to evade payment of tax and corresponding State Tax Act and penalty is liable to be imposed.

5. The details of tax payable, as ascertained above, has also been communicated to the Noticee in Audit Memo dated 04.11.2021 (RUD-4). However, the Noticee has not filed any written reply to the above Audit Memo, consequently, FAR dated 08.02.2023 was issued to the Noticee (RUD-1).

[Shilpi Jain]

The 52nd council meeting press release has something on this...

A circular is proposed to be issued.. no consideration paid no liability.