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GST & Personal guarantee of the director’s
Whether the personal guarantee provided by the director is service provided by them to the company over and above the normal director services? Is it liable for GST under RCM on a notional basis?
The GST audit activities are taking a new leap. Recently, in a GST audit conducted by the authorities, the department has started demanding GST on the personal guarantee given by the directors to their company.
The Department is taking a stand that personal guarantee provided by director is nothing, but the service provided by them to the company over and above the normal director services and company is liable to pay GST on the same under RCM on notional charges as per prevailing market rates applicable on such guarantees.
As per clause 1 of schedule III of the CGST Act, services provided by any employee to the employer in course of or in relation to his employment shall not be treated as supply transaction and hence not liable to GST. One can take a view that giving of personal guarantee by a director is nothing but service by an Employee (Director) to the employer (company) in relation to his (director’s) employment and hence not liable to GST.
There is also an RBI circular which has laid down the conditions for issuance of such personal guarantee by the directors. As per the RBI Master circular and guidelines, in certain cases of extending the credit facility like Overdraft or term loans, the bank is required to obtain personal guarantees from the directors of the company and in absence of the same the banks avoids/ refrain from extending the credit. Hence providing personal guarantee is more of a compulsion for the director than a choice.
Also, as per the master circular of RBI in case of any personal guarantees given by the directors for the purpose of any credit facility, the guarantees should be without any consideration in any form.
As of now there is no clear answer to this query as the GST authorities have taken a stand to demand GST on such personal Guarantees.
Any future departmental clarification or judiciary case can only settle this grey area. However, the collective question to ponder upon here is that:
1.can GST be leviable in cases where there is condition by RBI, which is India’s central bank and regulatory body for Indian Banking system, to provide the personal guarantee and the directors does not have a choice in the same.
2.In case where an institution like RBI itself bars to take or receive any consideration in respect of such personal guarantee, can GST law override such restrictions of other laws and create a notional consideration for charging GST on the same
3.Guarantees are given by Directors in their personal capacity . Hence it is not an activity done in the course or furtherance of their business and out of the definition of supply.
Let us hold on for the final answer on the issue and let the GST council or judiciary settle the controversial issue.