Last reviewed: 25 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 No. 204/16/2023-GST dated 27 October 2023 answers it in the taxpayer's favour, and does so on a specific footing that is worth getting right, because field officers continue to conflate a director's personal guarantee with an inter-company corporate guarantee and 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 value of 1% per annum of the amount guaranteed, subject to the proviso inserted by Notification No. 12/2024-Central Tax dated 10 July 2024 with retrospective effect from 26 October 2023, under which the value declared in the invoice governs where the recipient is eligible for full input tax credit. Nothing in law prevents one group company from charging another a guarantee commission, so a value can be fixed for that supply. The confusion in the field has been that some officers apply the same 1%-per-annum approach to a director's personal guarantee, treating the two as interchangeable simply because both involve a "related person" guaranteeing company debt. They are not interchangeable, and the reason is legal rather than commercial: a company is barred from paying its director for the guarantee in the first place.
What Circular 204/16/2023 clarifies
Circular No. 204/16/2023-GST dated 27 October 2023 deals with both guarantees and reaches them by different routes. For a director's personal guarantee it starts from the Reserve Bank of India's directions — RBI Circular RBI/2021-22/121 dated 9 November 2021, para 2.2.9 — under which a bank must obtain an undertaking from the borrowing company and from the guarantor that no consideration by way of commission, brokerage, fees or in any other form will be paid by the company to, or received by, the director, directly or indirectly, for furnishing the guarantee. The prohibition runs between the company and its director. It is not a restriction on what the bank charges the company, and a reply drafted on that misreading invites the officer to dismiss it.
The reasoning follows from there. Because no consideration can lawfully pass between the company and the director for this service, the circular concludes that there is no question of the transaction having an open market value; the open market value is therefore treated as zero, and the taxable value under Rule 28 is accordingly nil. No GST is payable on the guarantee. The circular is not invoking any proviso to Rule 28(1) for this purpose — the value is nil because the open market value is zero, and that is the ground to plead.
The circular records the exception in the same breath: where the director who gave the guarantee is no longer connected with the management, or where remuneration or consideration is in fact paid to a promoter, director, managerial personnel or shareholder for the guarantee, the taxable value is that actual consideration, direct or indirect.
Director's personal guarantee vs corporate guarantee: valuation compared
| Feature | Director's personal guarantee | Corporate (inter-company) guarantee |
|---|---|---|
| Governing rule | Rule 28 read with Circular No. 204/16/2023-GST — open market value is zero, so taxable value is Nil | Rule 28(2) — deemed value of 1% p.a. of the amount guaranteed, subject to the proviso inserted by Notification No. 12/2024-Central Tax |
| Why treated differently | RBI directions bar the company from paying, and the director from receiving, any consideration — so no open market value can exist | Nothing bars a group company from charging a guarantee commission, so a real or deemed value can be fixed |
| Taxable value if no fee paid | Nil | Invoice value, if the recipient is eligible for full ITC (proviso to Rule 28(2), retrospective from 26 October 2023); otherwise 1% p.a. of the amount guaranteed |
| Taxable value if a fee/commission is actually paid | GST applies on the actual consideration paid | The actual consideration. The Gujarat High Court read down the words whichever is higher in Torrent Power Ltd v. Union of India (14 August 2026). Torrent Power also held that the levy under Rule 28(2) cannot reach guarantees furnished before 26 October 2023 retrospectively (where such a guarantee continues, tax can apply only prospectively from that date), and otherwise upheld Rule 28(2). The department may take the matter to the Supreme Court; we had not traced an SLP as of 25 September 2026. |
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 No. 204/16/2023-GST, however, because RBI's directions bar the company from paying its director anything for the guarantee and nothing was in fact paid, the open market value is zero and the taxable value under Rule 28 is Nil — 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.
Cross-border: a foreign parent guaranteeing an Indian subsidiary’s borrowing
The Nil route above is specific to an individual director. Where a foreign parent company guarantees a loan taken by its Indian subsidiary, the subsidiary is receiving a service from a related person outside India. Under Schedule I, that import of service is a supply even without consideration; the subsidiary pays the tax under reverse charge, and the value follows Rule 28(2) — including its full-input-tax-credit proviso — rather than the personal-guarantee circular. The analysis is set out in our corporate guarantee valuation guide, and our foreign subsidiary accounting and FEMA compliance service covers the RCM entries and documentation for Indian subsidiaries.
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 No. 204/16/2023-GST.
- Pleading the RBI point the wrong way round. The bar is on the company paying its director, not on the bank pricing the guarantee, and it comes from para 2.2.9 of RBI Circular RBI/2021-22/121 dated 9 November 2021.
- Citing a proviso to Rule 28(1) as the source of the Nil value. The circular's basis is that the open market value is zero. The second proviso to Rule 28(1) is the full-input-tax-credit provision and turns on the recipient company's credit position, which is not the question here.
- 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 Circular RBI/2021-22/121 dated 9 November 2021 requires an undertaking that the company will pay the director nothing for the guarantee, that the open market value is therefore zero, 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 a supply by a related person under Schedule I of the CGST Act, but no GST is payable where the company pays the director nothing for it. RBI's directions require the bank to obtain an undertaking that no commission, brokerage or fee will be paid by the company to, or received by, the director for the guarantee, so, as CBIC Circular No. 204/16/2023-GST puts it, the transaction can have no open market value. The open market value is treated as zero and the taxable value under Rule 28 is Nil.
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): the value declared in the invoice where the recipient is eligible for full input tax credit, and otherwise 1% per annum of the amount guaranteed. A director's personal guarantee is not covered by that rule at all. Because RBI's directions bar the company from paying its director any consideration for the guarantee, no open market value can exist, and the taxable value is Nil where no fee is paid.
What is CBIC Circular 204/16/2023 and what does it clarify?
It is the CBIC circular of 27 October 2023 on the taxability of personal and corporate guarantees. On personal guarantees it holds that, since para 2.2.9 of RBI Circular RBI/2021-22/121 dated 9 November 2021 requires an undertaking that no consideration will be paid by the company to the guaranteeing director, the open market value of that supply is zero and the taxable value under Rule 28 is Nil. Where remuneration is in fact paid, for instance to a director no longer connected with the management, the actual consideration is taxable.
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 the normal GST valuation rules, and GST applies on that amount. Circular No. 204/16/2023-GST says the same for a director no longer connected with the management who is paid for the guarantee. The Nil-value position holds only where no consideration passes.
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 No. 204/16/2023-GST, explain that Rule 28(2) was drafted for corporate guarantees and not for personal guarantees by directors, and set out the correct ground: RBI Circular RBI/2021-22/121 bars the company from paying its director for the guarantee, so the open market value is zero and the taxable value under Rule 28 is Nil. Support it with the board resolution and sanction letter showing no fee was paid.
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.