In general trade parlance, directors of the company executes personal guarantee for term loan and cash credit facilities enjoyed by the company from various Banks and NBFCs. If a claim is made under the guarantee, the director will be liable to pay the company’s debt and, if he does not do so, the bank (or other beneficiary of the guarantee) will be able to take him to court and ultimately enforce a judgment debt against his assets. If the director does not have sufficient assets to cover the debt, he may be made bankrupt. In addition to the effect on his credit rating and the difficulty of obtaining financial services, insurance and so on, an un-discharged bankrupt may not act as company director without leave of the court. Thus, here issue arises that whether the personal guarantee given by the whole-time director will be taxable under GST regime?
Under the GST regime, the levy is on ‘supply’ either of goods or services or both. Thus, for levy of GST on the service provided by a director by giving a personal guarantee for a loan raised by a company, there must be a ‘supply’. To determine ‘supply’ under GST, we shall have to examine whether the present transaction falls under ‘goods’ or ‘services’. Section 2(52) of the CGST Act, defines ‘Goods’ and states that it means every kind of movable property. Further, Section 2(102) of the CGST Act defines ‘services’ and states that anything other than goods is service. It is evident that personal guarantee does not fall in the ambit of ‘goods’ under GST, since a guarantee is not a movable property, rather, it is incorporeal and does not fit any qualifications laid down by the definition. Thus, the said transaction will be considered as service and GST will be charged on said supply of service transaction. The personal guarantee can also be said to be a service based on a judgement of the Delhi High Court in the case of Controls & Switchgear Contactors Limited vs. DCIT.
Next it has to be determined whether the said service of providing personal guarantee falls under the term ‘supply’ under the GST regime. The term ‘supply’ has been defined under Section 7 of the CGST Act. As per the said section 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. However, there is no element of consideration paid to the directors for the guarantee given, whether monetary or otherwise. But, the definition of supply in Section 7(1)(c) of the CGST Act also includes the activities that have been specified in Schedule I of the CGST Act, 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. 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.
Further, it is necessary to ascertain whether the transaction of providing personal guarantee is in the course or furtherance of the business of the director. The term ‘business’ is defined under Section 2(17) of the CGST Act. 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.
However, it is to be noted that Section 7(2)(a) specifies that the activities listed in Schedule III of the CGST Act would not be considered as a ‘supply’. This Schedule contains a list of activities that have been excluded from the scope of supply. Entry 1 thereof lists services done by an employee to the employer ‘in the course of or in relation to his employment’ as one of the services that would not be considered as a ‘supply’ as per the definition. Thus, if the personal guarantee is given during the employment as per the terms of employment, then the same can be said to be in the course of employment and qualifies under Schedule III as an activity that shall not be treated as a supply under the definition of supply under Section 7. Therefore, the personal guarantee executed by the director for term loan or cash credit facilities enjoyed by the Company shall not be chargeable to GST, if it is in the nature of a service provided by an employee to an employer in the course of or in relation to the employment.