Introduction
It is a common practice for companies to borrow money, and/or raise a loan from banks and/or financial institutions during the course of business. Under most circumstances, it is necessary for the borrower to furnish personal guarantees/securities to secure a loan from the banks/financial institutions. Further, in most cases, it is the director of the borrower company who furnishes a personal guarantee to avail loan on behalf of the company. However, because the Director furnishes such a guarantee himself, no fee is paid by the company to the director for furnishing such a guarantee.
Previously, as there was no ‘flow of consideration’ in the case of the above-mentioned transaction, it did not qualify as ‘supply’ as per the provisions of s. 7 of the Central Goods and Services Act, 2017 (‘CGST Act’), and hence, no GST was liable to be paid.
However, the GST Department vide Notification No. 13/2017 Entry No. 6[i] (‘GST Notification’) clarified that supplies made by the director of a company to the body corporate shall be taxable under the Reverse Charge Mechanism (‘RCM’), and the said tax shall be payable by the recipient of the service, i.e., the company/body corporate.
In BST Steels v. Superintendent of Central Tax[ii] (‘writ petition’), the Telangana High Court, while affirming the order passed by the GST Appellate Tribunal (Commissioner Appeals-II), held that any personal property belonging to the Managing Director (‘MD’) of a company, furnished as a personal security/guarantee to the bank on behalf of the company, would be liable to GST on reverse charge basis.
Brief Facts
The MD of BST Steels furnished his personal property as a guarantee/security to the bank on behalf of his company (‘borrower company’).
As per the GST Department, the borrower company was liable to pay GST on a reverse charge basis on the abovementioned transaction. Accordingly, the Superintendent of Central Tax duly imposed this tax.
Being aggrieved by the said imposition of tax, the borrower company approached the GST Appellate Tribunal (Additional Commissioner-Appeals), which further affirmed the imposition of tax levied by the Superintendent of Central Tax on a reverse charge basis vide order dated 31.03.2023.
Thereafter, the borrower company challenged the order passed by the GST Appellate Tribunal, levying GST on the said transaction, vide the said writ petition.
Held
The Telangana High Court, while dismissing the writ petition, held that Entry No. 6 of the GST Notification specifically notifies that GST shall be leviable on the services provided by the director of a company to a body corporate on a reverse charge basis and on the occurrence of the said event, the body corporate shall be liable to pay tax for the service so rendered by the director of the company.
Further, considering that the GST Notification was not under challenge and still valid under law, the order passed by the First Appellate Authority and the Appellant Tribunal was held to be completely valid and justified under the law.
Analysis
In the erstwhile service tax regime, supply without consideration was entirely excluded from the ambit of service, meaning thereby that no tax was leviable on any service for which no consideration was payable. However, currently, in the GST regime, any supply of goods/services between related persons made in the furtherance of business, with or without consideration, is leviable to GST.
The issue of taxability of guarantees given by related parties continues to be a contentious issue. The judgment passed by the Telangana High Court in the present matter can be said to be uncontroversial and one in which the Court has strictly read and applied the law, as provided in the GST Notification.
Personal guarantees offered by directors without consideration, may or may not qualify as a service, especially when such an activity is a part and parcel of the general obligations that a director is liable to undertake by virtue of their position in the company. Further, the language mentioned under Entry 6 of the GST Notification is loosely worded, making it vulnerable to multitudes of erroneous interpretations. The meaning and ambit of the word ‘service’ continues to be ambiguous, unclear, and entirely open to interpretation. A safe and uncontroversial reading of the same would invariably always favour the Revenue, especially when the ‘service’ being offered by the directors can be interpreted in multiple ways. On the contrary, an unconventional reading of the same would make the said Entry open to favourable and flexible interpretations.
However, it is important to note that taking personal guarantees from directors of a borrowing company is a practical security measure by banks and is not always insisted upon by banks.
As per the 52nd GST Council Meeting held on 07.10.2023, the GST Council has issued clarification regarding the taxability of personal guarantees offered by directors to banks. It has been recommended that when no consideration is paid by the company to the director in any form, directly or indirectly, for providing a personal guarantee to the bank/financial institutions on their behalf, the open market value of the said transactions may be treated as zero. Hence, no tax shall be leviable in respect of such services.[iii] Thus, in the present case itself, if no consideration were paid by the company to the MD of BST Steels for the personal guarantee secured by the MD, the issue at hand would not have arisen at all.
End Notes
[i] Notification No. 13/2017- Central Tax (Rate) dt. 28.06.2017
[ii] (2023) 155 taxmann.com 143
[iii]Recommendations of 52nd GST Council Meeting, in PIB (2023), https://www.pib.gxov.in/PressReleasePage.aspx?PRID=1965431
Authored by Anshi Bhatia, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.