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Justification to levy GST u/s 9(3) of the

Act on personal guarantees given by the

Directors of a company to Lending Bank

Show cause notices are being issued to the
companies by GST Department while conducting
audit proposing to levy of CGST and SGST u/s 9(3) of
CGST Act (RCM) on notional value of commission
towards personal guarantees given by the Managing
Director/Directors of the company to Lending Bank
against long term/short term borrowings. In SCN not
only the tax is being proposed to be levied but also
interest for the period from 01.07.2017 onwards and
CA. P.D. Nagar
penalty is also proposed. Such notices can be
challenged in following manner :- by Managing or working Directors in their personal

01) Validity of notice capacity to act as Guarantor, in case the Company
fails to pay its debt to Banks.
1.1) At the outset, personal guarantee is given by the
managing director for availing term loan or cash 1.2) The managing director is not supposed to be
credit facilities in furtherance of the business of the paid any commission for giving personal guarantee
company as one of his duties in terms of to the bank over and above remuneration on which
employment. The managing director is being paid tax is deducted at source under Income tax Act. The
remuneration as approved by the shareholders in Central tax (rate) dated 28.06.2017 vide entry no.
the General Meeting for supervision and control (6), it was clarified by the Central Board of Indirect
over the business of the company. Taxes and Customs clarified vide Notification no.
(13)/2017 that the directors remuneration which
As per S. No.1 of Schedule-III of CGST Act, the
are declared as salary in the books of the company
services by the employee to the employer in the and subjected to TDS under Income tax Act are not
course of his employment is outside the scope of
taxable being consideration for services by an
“supply” term loan as well working capital loans are employee to the employer in the course of his
availed against securities in the form of all
employment in terms of Schedule-III of CGST Act.
immovable and movable assets of the company yet
the banks insist upon personal guarantee of the Though RCM services provided by the directors to
managing director, which is given under compulsion the company have been notified on which GST
without any consideration.. The remuneration given needs to be paid by company but services provided
to the managing director, covers all services required by the director in the capacity of an employee are
for furtherance of the business of the company not subjected to GST. The consideration for such
which includes personal guarantee against loans, in services may be sitting fees, or payment for any
case it is asked for by the Bank/Financial Institutions. specific technical services. Such services are
undoubtedly given by any director in the capacity
Such Personal guarantees are required to be given,
other than employee but personal guarantee to

72 No officer can travel beyond the territory of the SCN.