Corporate vs. Personal Guarantee under GST in India: A Comprehensive Guide (Updated 2025)
Contents
Introduction to Guarantees and GST
Businesses often need loans. Lenders require assurance that the loan will be repaid. This assurance comes in the form of guarantees. A guarantee is a promise by a third party to pay if the borrower defaults.
In India, guarantees are common in business finance. Two main types are corporate guarantees and personal guarantees. Understanding how GST applies to these is important, especially with recent updates as of April 26, 2025.
| Type of Guarantee | Who is the Guarantor? |
|---|---|
| Corporate Guarantee | Another company guarantees the debt. |
| Personal Guarantee | An individual (like a director) guarantees the debt. |
Note: This guide focuses on GST in India based on rules as of April 26, 2025. Tax laws can change. Always consult a GST professional for specific advice.
Corporate Guarantee under GST
When one company guarantees the debt of another, it's a corporate guarantee. Under Indian GST law, this is treated as a 'supply of service'.
Why is it a service? Because the guarantor company is providing a service by taking on the risk. This service is taxable under Section 7 of the CGST Act, 2017. This applies even if no fee is charged, especially between related companies (as per Schedule I).
Valuation of Corporate Guarantee for GST
How do you calculate the GST value? This is key, especially for guarantees between related companies (like a parent and subsidiary). Rule 28(2) of the CGST Rules, 2017, provides the method.
| Scenario | How to Value for GST (Related Parties) |
|---|---|
| Actual Consideration Charged | Value is the actual amount charged. |
| No Consideration Charged | Value is deemed to be 1% of the guaranteed amount per annum. |
| Actual Consideration < 1% of Guaranteed Amount | Value is deemed to be 1% of the guaranteed amount per annum. |
| Recipient Eligible for Full ITC | Value declared in the invoice may be accepted even if less than 1%. |
The GST rate on corporate guarantees is the standard rate for services, which is currently 18%.
Warning Note: If your company provides corporate guarantees, especially to related companies, you must correctly value this service using Rule 28(2) and pay GST, even if no money changes hands. Not doing so can lead to penalties.
Personal Guarantee under GST
A personal guarantee is when an individual, usually a director or promoter, guarantees a company's loan using their personal assets.
Is this a supply of service? Yes, when a director guarantees their company's loan, it's considered a service between related persons (director and company are related). This could be a 'supply' even without payment (Schedule I).
Taxability of Personal Guarantee (by Director)
The taxability of personal guarantees by directors without payment was unclear for a while. However, a key clarification has provided relief.
| Scenario | GST Implication (Director Guarantee for Company) |
|---|---|
| No Consideration Paid to Director | Value treated as NIL. No GST payable. (Aligned with RBI guidelines) |
| Consideration Paid to Director | Taxable value is the consideration paid. GST is payable on this amount. |
This clarification recognizes that RBI guidelines often prohibit companies from paying directors for personal guarantees. Therefore, if no payment happens, the value is zero, and no GST applies. This is a major relief for many businesses and directors.
Note: The GST exemption for personal guarantees is strictly for cases where *no* payment is made to the director for the guarantee service. Any payment, direct or indirect, will trigger GST.
Key Differences
Here's a quick comparison of the main differences in GST treatment:
| Feature | Corporate Guarantee | Personal Guarantee (by Director for Company) |
|---|---|---|
| **Guarantor** | Company | Individual (Director) |
| **Taxability (No Consideration, Related Parties)** | Taxable (based on deemed value) | Generally Not Taxable (Value NIL as per clarification) |
| **Valuation Rule** | Rule 28(2) - 1% p.a. or actual consideration (higher) | Open Market Value (treated as NIL when no consideration) |
| **Impact of RBI Guidelines** | Less direct impact on taxability/valuation rules. | Directly influences the 'no GST' stance when no consideration is paid. |
Warning Note: Don't confuse the two! The rules are different. A corporate guarantee between related parties without payment *is* taxable, but a director's personal guarantee for their company without payment *is generally not*.
Impact of Recent Amendments (as of April 2025)
GST rules are updated regularly. As of April 26, 2025, the key recent changes affecting guarantees are:
| Amendment/Clarification | What it Changed |
|---|---|
| Insertion/Amendment of Rule 28(2) (Effective Oct 26, 2023) | Provided a specific, clear rule for valuing corporate guarantees between related parties (1% p.a. or actual consideration). |
| Clarification on Annual Valuation | Confirmed that the 1% valuation for corporate guarantees applies each year for multi-year guarantees. |
| Clarification on Personal Guarantees by Directors | Explicitly stated that the value is NIL and no GST is payable if no consideration is paid, aligning with RBI rules. |
These updates provide more certainty and reduce confusion regarding the GST treatment of guarantees.
Note: The changes to Rule 28(2) for corporate guarantees were made retrospective from October 26, 2023. This means they apply to guarantees issued or renewed from that date onwards.
Conclusion
Corporate and personal guarantees have different GST treatments in India. Corporate guarantees between related companies are taxable based on a specific valuation rule (1% or actual consideration). Personal guarantees by directors for their companies are generally not taxable if no payment is involved, thanks to recent clarifications aligned with RBI rules.
Staying informed about these rules and their updates is vital for correct GST compliance and financial planning. Always seek professional advice for your specific situation.
Frequently Asked Questions (FAQs)
Is GST applicable on corporate guarantees in India?
Yes, providing a corporate guarantee is a taxable supply of service under Indian GST.
How is the value of a corporate guarantee determined for GST?
For related parties, it's the higher of 1% of the guaranteed amount per year or the actual amount charged (Rule 28(2)).
Does the 1% rule for corporate guarantees apply every year?
Yes, the 1% valuation is calculated annually for multi-year corporate guarantees.
Is GST applicable on personal guarantees by directors?
Generally no, if the company does not pay any consideration to the director for the guarantee, in line with RBI guidelines.
What if a director *is* paid for a personal guarantee?
If the director receives consideration, GST would be applicable on that amount.
Are there exemptions for corporate guarantees?
While generally taxable, specific situations exist, like the impact of the recipient's eligibility for full Input Tax Credit (ITC) on valuation. Director guarantees have a specific exemption when no consideration is paid.
When did the new corporate guarantee valuation rule (Rule 28(2)) start?
The specific valuation rule for corporate guarantees between related parties became effective from October 26, 2023.