Mr. Goenka, director of Flamingo Ltd., provides personal guarantee on 31 st October to a nationalized bank for sanctioning the cash credit facility…

Since director and company are related persons in terms of Schedule I of the CGST Act, 2017, the activity of providing personal guarantee by a director to the banks/ financial institutions for securing credit facilities for their companies is to be treated as a supply of service, even when made without consideration. Thus, the activity of providing personal guarantee by Mr. Goenka to the nationalized bank will qualify as supply. Value of such supply will be the open market value (OMV) in terms of rule 28 of the CGST Rules, 2017. However, as per RBI Guidelines, no consideration by way of commission, brokerage fees or any other form, can be paid to the director by the company, directly or indirectly, in lieu of providing personal guarantee to the bank for borrowing credit limits, except in exceptional cases. Thus, it is clarified that OMV of said supply may be treated as zero / Nil and therefore, no tax is payable on such supply of service by Mr. Goenka to Flamingo Ltd.