Last reviewed: 10 September 2026. A director personally guaranteeing the company's bank loan is a routine part of raising credit for many Indian businesses — but because a director is a related party to the company under GST law, this guarantee is, in principle, a taxable supply. The question that has generated real confusion, and a wave of notices, is at what value. CBIC Circular 204/16/2023 draws a sharp and taxpayer-favourable distinction between a director's personal guarantee and a corporate guarantee between group companies, but some field officers continue to conflate the two, issuing notices that apply the wrong valuation rule.
Why a director's guarantee is a "supply" at all
Under GST, a director is treated as a related person to the company for valuation purposes, because of the control/employment relationship between them. When a director extends a personal guarantee to a bank so that the company can access a loan or credit facility, this is, in form, a service rendered by the director (a related person) to the company, even where no explicit fee changes hands — related-party transactions between such persons are deemed to be a supply under GST even without consideration, because of Schedule I of the CGST Act. The real battleground, therefore, is not whether GST applies at all, but at what value it should be computed, since the director typically receives no separate payment for the guarantee.
The corporate guarantee rule, and why it does not fit personal guarantees
For corporate guarantees — where one company in a group guarantees a loan taken by another group company — Rule 28(2) of the CGST Rules prescribes a deemed valuation mechanism: broadly, 1% per annum of the amount guaranteed, or the actual consideration, whichever is higher. This rule exists because, between corporate entities, an open-market comparable for guarantee commission is at least conceptually available, and the deemed-value formula gives both sides a predictable number to work with. The confusion in the field has been that some officers have applied this same 1%-per-annum deemed-value approach to director's personal guarantees as well, treating the two situations as interchangeable simply because both involve a "related person" guaranteeing company debt.
What Circular 204/16/2023 clarifies
CBIC Circular 204/16/2023 draws the distinction explicitly. It confirms that Rule 28(2)'s deemed-value mechanism was drafted specifically for corporate guarantees between related corporate entities, not for a personal guarantee given by an individual director. For a director's personal guarantee, the circular directs attention instead to the second proviso to Rule 28(1), which allows the taxable value to be treated as Nil where the open market value of the supply cannot be determined. The circular notes that RBI regulations in fact bar banks from independently charging a company for a director's personal guarantee as a distinct, separately priced service — which means there is, by design, no market mechanism by which an "open market value" for this specific service could even be ascertained. Where no consideration (fee or remuneration) is actually paid by the company to the director for the guarantee, the taxable value can therefore be treated as Nil, and no GST liability arises on this account.
Director's personal guarantee vs corporate guarantee: valuation compared
| Feature | Director's personal guarantee | Corporate (inter-company) guarantee |
|---|---|---|
| Governing rule | Second proviso to Rule 28(1) — Nil value where open market value cannot be determined | Rule 28(2) — deemed value, broadly 1% p.a. of guaranteed amount or actual consideration, higher of the two |
| Why treated differently | RBI rules bar separate pricing of a director's personal guarantee, so no open market value exists | An open-market comparable is conceptually available between corporate entities |
| Taxable value if no fee paid | Nil | Not Nil — deemed value still applies even without actual consideration |
| Taxable value if a fee/commission is actually paid | GST applies on the actual consideration paid | Higher of actual consideration or 1% p.a. deemed value |
Worked example
A private limited company avails a term loan of ₹10 crore from a bank, and the managing director personally guarantees the facility as a condition of sanction, receiving no fee, commission or other consideration from the company for doing so — a fact recorded in the board resolution approving the loan and in the bank's sanction letter, which notes the personal guarantee is furnished without separate remuneration. If a field officer issues a notice applying the 1%-per-annum corporate-guarantee deemed-value rule to this arrangement, it would suggest a notional taxable value of roughly ₹10 lakh per year (1% of ₹10 crore) and a resulting GST demand of around ₹1.8 lakh per year at 18%, compounding across the years under demand. Under Circular 204/16/2023, however, because no fee was paid to the director and RBI rules preclude the bank from independently pricing a personal guarantee, the taxable value is Nil under the second proviso to Rule 28(1) — there is no GST liability on this guarantee at all, and the notice, to the extent it applies the corporate-guarantee valuation, is misconceived. If the same company had instead agreed to pay the director an annual guarantee commission of, say, ₹5 lakh, GST at 18% (₹90,000) would then apply on that actual ₹5 lakh consideration under the normal valuation rules — because an actual fee changes the analysis entirely.
Common mistakes and red flags
- Treating a director's personal guarantee and a corporate (inter-company) guarantee as governed by the same valuation rule — they are governed by different Rule 28 provisions with very different outcomes.
- Not maintaining clear documentary evidence (board resolution, loan sanction letter) that no fee was paid to the guaranteeing director.
- Failing to explicitly flag, in a reply to a notice, that Rule 28(2)'s deemed-value mechanism was designed for corporate guarantees and does not extend to personal guarantees under Circular 204/16/2023.
- Overlooking that if the company does pay the director a guarantee commission, GST does apply on that actual amount — the Nil-value position only holds where no consideration passes.
- Assuming this Nil-valuation position also applies to a corporate guarantee given by a holding company for its subsidiary — it does not; that remains squarely within the Rule 28(2) deemed-value regime.
What companies should do now
Companies where a director has furnished a personal guarantee for a bank facility should ensure the board resolution and loan sanction documentation clearly record that no fee, commission or other consideration was paid to the director for the guarantee — this is the primary evidence needed to support a Nil valuation under Circular 204/16/2023. Where a notice has already been received valuing the guarantee under the corporate-guarantee formula, the reply should explicitly distinguish the two categories and point to the circular's own basis for doing so, namely that RBI regulations preclude separate pricing of a personal guarantee and that Rule 28(2) was never intended to cover this situation. Where the company does pay the director a guarantee commission, that arrangement should be priced and documented carefully, since GST will then apply on the actual consideration under the ordinary valuation rules rather than the Nil-value route.
Frequently asked questions
Is GST payable when a director personally guarantees the company's bank loan?
A director's personal guarantee is, in principle, a supply by a related person, but under CBIC Circular 204/16/2023, where no fee or consideration is paid by the company to the director for the guarantee, the taxable value can be treated as Nil under the second proviso to Rule 28(1), meaning no GST liability actually arises.
How is a director's personal guarantee different from a corporate guarantee for GST valuation?
A corporate guarantee between related companies is valued under Rule 28(2), broadly at 1% per annum of the guaranteed amount or actual consideration, whichever is higher, even without actual payment. A director's personal guarantee is not covered by this deemed-value rule; because RBI regulations bar banks from separately pricing a personal guarantee, no open market value can be determined, and the value is Nil if no fee is paid.
What is CBIC Circular 204/16/2023 and what does it clarify?
It is a CBIC circular clarifying, among other things, that the Rule 28(2) deemed-value mechanism for guarantees was designed for corporate (company-to-company) guarantees, not personal guarantees furnished by individual directors, and that a director's personal guarantee given without consideration can be valued at Nil under the second proviso to Rule 28(1).
What documents should a company keep to support the Nil-valuation position?
The board resolution approving the loan facility and the bank's loan sanction letter should clearly record that the director's personal guarantee was furnished without any separate fee, commission or remuneration from the company, since this absence of consideration is the basis for the Nil valuation.
What happens if the company does pay the director a fee for the personal guarantee?
If the company pays the director a guarantee commission or fee, that actual consideration becomes the basis for valuation under normal GST valuation rules, and GST would apply on that amount — the Nil-value position under Circular 204/16/2023 applies only where no consideration is paid.
I received a notice valuing my director's personal guarantee using the 1% corporate-guarantee formula — what should I do?
This is a common field-level error that conflates two differently governed situations. The reply should point to Circular 204/16/2023 and explain that Rule 28(2) was drafted for corporate guarantees, not personal guarantees by directors, supported by board resolution and sanction letter evidence that no fee was paid; professional assistance in drafting this reply is advisable given the technical distinction involved.
If you have received a notice valuing a director's personal guarantee under the corporate-guarantee rule, or want your loan and board documentation structured to support a Nil valuation, we can review your paperwork and assist with the notice reply.
GST Advisory Services GST Notice Handling Talk to usThis article is general information for educational purposes, not a legal opinion on any specific case or notice. GST law, circulars and judicial positions referenced above are subject to change and to the final orders of the relevant courts and authorities; verify the current status before acting, and consult a qualified professional with your specific facts before deciding how to respond to any notice.