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TMI Blog2024 (10) TMI 943X X X X Extracts X X X X X X X X Extracts X X X X ..... sued vide Circular No.204/16/2023-GST dated 27-10-2023 and also by Circular No.218/12/2024-GST dated 26-06-2024 issued by the GST Policy Wing, Central Board of Indirect Taxes and Customs, Department of Revenue, Ministry of Finance, Government of India. The questions raised are whether any GST is payable on reverse charge basis on supply of services by the Managing Director of the company by way of providing personal guarantee on loans taken by the company and whether any GST is payable on supply of services by way of extending loans by the petitioner-company to its subsidiary company. In Circular No.204/16/2023-GST dated 27-10-2023 it was clarified as follows: Sl. No. Issue Clarification 1 Whether the activity of providing personal gua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vember, 2021, which is reproduced below: "2.2.9 Guidelines relating to obtaining of personal guarantees of promoters, directors, other managerial personnel, and shareholders of borrowing concerns Banks should take personal guarantees of promoters, directors, other managerial personnel or major shareholders for the credit facilities granted to corporates, public or private, only when absolutely warranted after a careful examination of the circumstances of the case and not as a matter of course. In order to identify the circumstances under which the guarantee may or may not be considered necessary, banks should be guided by the following broad considerations: ................................. C. Worth of the guarantors, payment of guaran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As such, when no consideration can be paid for the said transaction by the company to the director in any form, directly or indirectly, as per RBI mandate, there is no question of such supply/ transaction having any open market value. Accordingly, the open market value of the said transaction/ supply may be treated as zero and therefore, taxable value of such supply may be treated as zero. In such a scenario, no tax is payable on such supply of service by the director to the company. There may, however, be cases where the director, who had provided the guarantee, is no longer connected with the management but continuance of his guarantee is considered essential because the new management's guarantee is either not available or is foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as supply, even if made without consideration. Therefore, it is evident that the service of granting loan/ credit/ advances by an entity to its related entity is a supply under GST. 2. Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services) are exempted under sub entry (a) of entry 27 of Notification No. 12/2017-Central Tax (Rate). Therefore, it is clear that the supply of services of granting loans/ credit/ advances, in so far as the consideration is represented by way of interest or discount, is fully exempt under GST. 3. It is mentioned that overseas affiliates or domestic related persons are generally ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y include understanding the business of the applicant, as well as the purpose of the loan, financial standing and credibility of the applicant, how it is to be structured and the source of its repayment which may include analysis of the borrower's cash flow forecasts, the strength of the borrower's balance sheet, and where any collateral is offered, due diligence on the collateral offered may also be required to be carried out. To cover such costs, the independent lender generally collects a fee that is in the nature of processing fee/ administrative charges/ service fee/ loan granting charges, which is leviable to GST. 5. However, when an entity is extending a loan to a related entity, it may not require to follow such processes as are fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided between the said related persons in the form of processing/ facilitating/ administering the loan, by deeming the same as supply of services as per clause (c) of sub-section (1) of section 7 of the CGST Act, read with S. No. 2 and S. No. 4 of Schedule I of CGST Act. Accordingly, there is no question of levy of GST on the same by resorting to open market value for valuation of the same as per rule 28 of Central Goods and Services Tax Rules, 2017. 8. However, in cases of loans provided between related parties, wherever any fee in the nature of processing fee/ administrative charges/ service fee/ loan granting charges etc. is charged, over and above the amount charged by way of interest or discount, the same may be considered to be the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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