GST on Corporate Guarantees Between Related Companies: Valuation, ITC and Case Study

Corporate Guarantees Between Related Parties under GST: Taxability, Valuation and accounting treatment – Part 1

Summary: Corporate guarantees issued by holding companies or other related entities may attract GST even when no guarantee commission is charged, because Section 7 read with Schedule I recognises specified supplies between related persons without consideration. Rule 28(2), introduced on 26 October 2023 and retrospectively amended in July 2024, generally prescribes valuation at 1% of the guaranteed amount per annum or actual consideration, whichever is higher, subject to the full-input-tax-credit invoice-value proviso. CBIC Circular Nos. 204/16/2023-GST and 225/19/2024-GST address valuation, timing, loan utilisation, co-guarantors, forward and reverse charge, and exports. The article also discusses the Bombay High Court’s D.P. Jain ruling on guarantees furnished without consideration and the resulting interpretative dispute. A healthcare-group case study calculates the GST effect on a four-year ₹36 crore guarantee, illustrates restrictions on input tax credit for exempt and mixed supplies, and explains accounting entries and contingent-liability treatment under Accounting Standards. Companies should assess their contracts, recipients’ credit eligibility, guarantee periods, invoicing, and litigation exposure on the applicable facts.

GST on Corporate Guarantees Between Related Companies: Rule 28(2), ITC and Accounting

Background: 

When a Group Company Helps Its Subsidiary Borrow, Does GST Follow?

Corporate groups routinely support each other in obtaining bank finance.

A holding company may provide a corporate guarantee to a bank so that its subsidiary can obtain a term loan, working capital facility or other credit facilities. In many cases, no separate guarantee commission is charged. Commercially, this may appear to be nothing more than a shareholder or group-support function.

However, under the GST framework, the transaction can have consequences that are significantly different from its accounting or commercial treatment.

The central issue is simple:

Can GST be levied when a company provides a corporate guarantee for its related company without charging any consideration?

The answer under the current statutory and administrative framework is important for every corporate group, particularly after the insertion of Rule 28(2) of the CGST Rules, 2017 and the subsequent clarifications issued by the CBIC.

This article examines the taxability, valuation, timing, documentation and practical compliance issues relating to corporate guarantees between related parties.

1. Understanding a Corporate Guarantee

A corporate guarantee generally arises where one company undertakes responsibility towards a bank or financial institution for the financial obligations of another entity.

For example:

ABC Ltd. (Holding Company) provides a corporate guarantee to a bank for a ₹100 crore loan sanctioned to XYZ Ltd. (Subsidiary Company).

The immediate commercial arrangement may be:

Holding Company → Bank → Credit Facility to Subsidiary

However, for GST purposes, the analysis does not end with identifying the bank as the recipient of the guarantee document.

The GST authorities view the underlying arrangement as a service provided by the guarantor company on behalf of, and for the benefit of, the related recipient obtaining the credit facility.

2. Why Can GST Apply Even When No Guarantee Commission Is Charged?

Normally, GST is levied on a supply made for consideration in the course or furtherance of business under Section 7 of the CGST Act, 2017.

However, certain transactions are treated as supplies even when made without consideration.

This is where Schedule I to the CGST Act, 2017 becomes relevant.

Under Entry 2 of Schedule I, supply of goods or services between related persons, when made in the course or furtherance of business, can constitute a supply even without consideration.

SCHEDULE I –

ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION

1………..

2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:

Therefore, the GST analysis generally proceeds as follows:

Step 1: Are the entities related?

The relationship between the guarantor and the recipient must fall within the concept of related persons under Explanation to Section 15 of the CGST Act.

A holding company and its subsidiary would ordinarily fall within the statutory framework of related persons.

Meaning of related person-Explanation to Section 15

For the purposes of this Act, (a) persons shall be deemed to be “Related persons” if–– (i) such persons are officers or directors of one another’s businesses; (ii) such persons are legally recognised partners in business; (iii) such persons are employer and employee; (iv) any person directly or indirectly owns, controls or holds 25% or more of the outstanding voting stock or shares of both of them; (v) one of them directly or indirectly controls the other; (vi) both of them are directly or indirectly controlled by a third person; (vii) both of them directly or indirectly control a third person; or (viii) they are members of the same family;

(b) the term “person” also includes legal persons;

(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other business, shall be deemed to be related.

Step 2: Is a service being provided?

The provision of a corporate guarantee enables the related entity to obtain or enhance its credit facilities.

Step 3: Is the transaction covered by Schedule I?

If the corporate guarantee is regarded as a supply of service between related persons in the course or furtherance of business, the absence of monetary consideration does not automatically take the transaction outside GST.

CBIC, through Circular No. 204/16/2023-GST dated 27 October 2023, clarified that the provision of a corporate guarantee by a company for another related company, including by a holding company for its subsidiary, is to be treated as a supply of service under Schedule I even where no consideration is charged.

Circular No. 204/16/2023-GST

Issue : Whether the activity of providing personal guarantee by the Director of a company to the bank/ financial institutions for sanctioning of credit facilities to the said company without any consideration will be treated as a supply of service or not and whether the same will attract GST or not.

Clarification : → As per Explanation (a) to section 15 of CGST Act, the director and the company are to be treated as related persons. → As per clause (c) of sub-section (1) of section 7 of the CGST Act, 2017, read with S. No. 2 of Schedule I of CGST Act, supply of goods or services or both between related persons, when made in the course or furtherance of business, shall be treated as supply even if made without consideration. Accordingly, the activity of providing personal guarantee by the 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.

Rule 28 of Central Goods and Services Tax Rules, 2017 (hereinafter referred to as “CGST Rules”) prescribes the method for determining the value of the supply of goods or services or both between related parties, other than where the supply is made through an agent. In terms of Rule 28 of CGST Rules, the taxable value of such supply of service shall be the open market value of such supply. RBI has provided guidelines for obtaining personal guarantee of promoters, directors and other managerial personnel of the borrowing concerns vide Para 2.2.9 of its Circular No. RBI/2021-22/121 dated 9th November, 2021.

Refer circular for detail understanding ( click here)

3. Notification No. 52/2023-Central Tax: A Specific Valuation Rule

To address valuation issues, Notification No. 52/2023-Central Tax dated 26 October 2023 inserted sub-rule (2) to Rule 28 of the CGST Rules.

The provision specifically deals with the valuation of services of providing a corporate guarantee by a supplier to a banking company or financial institution on behalf of a related recipient.

This represented a significant shift from the general valuation approach under Rule 28.

CBIC subsequently clarified the applicability of the provision through Circular No. 204/16/2023-GST dated 27 October 2023.

NOTIFICATION No. 52/2023 – Central Tax (New Delhi, dated the 26th October, 2023)

Rule 28(2) – Notwithstanding anything contained in rule 28(1), → the value of supply of services by a supplier to a recipient who is a related person, by way of providing corporate guarantee to any banking company or financial institution on behalf of the said recipient, → shall be deemed to be 1% of the amount of such guarantee offered, or the actual consideration, whichever is higher.

Refer this notification (Click here)

4. The 1% Valuation Mechanism

The valuation framework under Rule 28(2) has undergone an important clarification and amendment.

The current position is based on the retrospective amendment made through Notification No. 12/2024-Central Tax dated 10 July 2024, effective from 26 October 2023.

The value of the supply of service of providing a corporate guarantee to a banking company or financial institution on behalf of a related recipient is:

1% of the amount of such guarantee offered per annum, or the actual consideration, whichever is higher.

This is a critical point.

The rule does not merely permit taxpayers to arbitrarily adopt a nominal guarantee commission where the prescribed value under Rule 28(2) is higher.

5. Practical Example

Assume the following:

Holding Company: ABC Ltd.

Subsidiary: XYZ Ltd.

Corporate Guarantee Amount: ₹50 crore

Guarantee Period: One year

Actual Guarantee Commission Charged: ₹10 lakh

Valuation:

1% of ₹50 crore = ₹50 lakh

Actual consideration = ₹10 lakh

Therefore:

Taxable Value = ₹50 lakh, being the higher amount.

GST would be payable on the applicable taxable value.

If GST is assumed at 18%:

GST = ₹9 lakh

Thus, even though the company actually charged only ₹10 lakh as guarantee commission, the valuation mechanism under Rule 28(2) may require a higher taxable value.

6. Is GST Payable When the Loan Is Not Fully Availed?

This became one of the major practical questions after Rule 28(2).

Suppose:

Corporate Guarantee sanctioned: ₹100 crore

Actual loan utilised: ₹40 crore

Should valuation be based on:

₹100 crore guarantee amount, or

₹40 crore actually disbursed?

The CBIC issued further clarification through Circular No. 225/19/2024-GST dated 11 July 2024 on several issues concerning corporate guarantees.

Circular No. 225/19/2024-GST (New Delhi, Dated the 11th July, 2024)

Subject: Clarification on various issues pertaining to taxability and valuation of supply of services of providing corporate guarantee between related persons.

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Issue No. 1 : In cases where the corporate guarantee is provided for a particular amount, whereas the loan is only partly availed or not availed at all by the recipient, what will be the value of supply of corporate guarantee. Also, whether the recipient would be eligible to avail full ITC (Input Tax Credit) even before total loan is disbursed?

Clarification : The activity of supply of the service of providing a corporate guarantee is not linked with the actual disbursal of the loan. The service that is provided by the guarantor to the guarantee is that of taking on the risk of default. Therefore, it is clarified that the value of supply of the service of providing a corporate guarantee will be calculated based on the amount guaranteed and will not be based on the amount of loan actually disbursed to the recipient of the corporate guarantee. Further, it is also clarified that the recipient of the service of providing corporate guarantee shall be eligible to avail the ITC, subject to other conditions specified in the Act and the Rules made thereunder, irrespective of when the loan is actually disbursed to the recipient, and irrespective of the amount of loan actually disbursed.

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Issue No. 2 : Where corporate guarantee is provided by more than one entity / co-guarantor, what is the amount on which GST is payable by each co-guarantor?

Clarification : In cases where corporate guarantee is being provided by multiple related entities, the value of such services of providing corporate guarantee shall be the sum of the actual consideration paid/ payable to co-guarantors, if the said amount of total consideration is higher than one per cent of the amount of such guarantee offered. In cases where the sum of the actual consideration is less than one per cent of the amount of such guarantee offered, then GST shall be payable by each co-guarantor proportionately on one per cent of the amount guaranteed by them. For instance, if there are two co-guarantors, A and B, who jointly provide a corporate guarantee to a banking/ financial institution on behalf a related recipient C for Rs. 1 crore, then A and B shall each pay GST on 0.5% of the amount guaranteed. However, if in the above case of A and B providing corporate guarantee jointly to a banking/ financial institution on behalf a related recipient C for Rs 1 crore, A provides guarantee for 60% of the guarantee amount and B provides guarantee for the remaining 40% of the guaranteed amount, then GST shall be payable by A and B proportionately i.e., 0.6% and 0.4% of the amount guaranteed. This is to say that A shall pay GST on 1% of the amount guaranteed by A, i.e., 1% on Rs. 60 lakhs and B shall pay GST on 1% of the amount guaranteed by B, i.e., 1% on Rs. 40 lakhs.

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Issue No. 3 :Where intra-group corporate guarantee is issued, whether GST may be paid by the recipient under reverse charge, as in the absence of actual invoice and payment, the recipient entity may not be able to claim input tax credit of tax paid by the domestic guarantor?

Clarification : It is clarified that in cases where domestic corporates issue intra-group guarantees, GST is to be paid under forward charge mechanism, and invoice is to be issued by the supplier of the service of providing corporate guarantee to the related recipient under Section 31 of CGST Act, 2017 read along with the relevant rules. However, in cases where such guarantee is provided by the foreign/ overseas entity for a related entity located in India, then GST would be payable under reverse charge mechanism, by the recipient of service, i.e., the related entity located in India.

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Issue No. 4 : Whether the discharge of tax liability on corporate guarantee @ 1% of such guarantee offered is to be done one time or on yearly basis or on monthly basis and when issued for a fixed term of say, five years or ten years as per tenure of the loan?

Clarification : Rule 28(2) of CGST Rules has been amended retrospectively with effect from 26th October 2023, vide notification No. 12/2024 -CT dated 10.07.2024. Therefore, it is clarified that the value of supply of the service of providing corporate guarantee to a banking company or a financial institution on behalf of a related recipient shall be one per cent of the amount guaranteed per annum or the actual consideration, whichever is higher. Accordingly, the value of supply of the service of providing corporate guarantee to a banking company or a financial institution on behalf of a related recipient for a particular number of years shall be one per cent of the amount of such guarantee offered multiplied by the number of years for which the said guarantee is offered or the actual consideration whichever is higher. In addition to the above, in cases where the corporate guarantee is provided for a period less than a year, say 6 months (half a year), then in those cases as well, the valuation may be done on proportionate basis for the said period, i.e., in this case, the value of the said supply of services may be taken as half of one per cent of the amount of such guarantee offered (6/12 * one per cent), or the actual consideration, whichever is higher. To illustrate the same, if a corporate guarantee is issued for a period of say five years, then the value of such guarantee is to be calculated at one per cent per year of the amount of such guarantee offered, or the actual consideration, whichever is higher, i.e., the value of such corporate guarantee provided would be 5% of the amount guaranteed or the actual consideration, whichever is higher. Therefore, GST would be payable on such amount at the time of issuance of such corporate guarantee, i.e., 5% of the amount guaranteed or the actual consideration, whichever is higher. However, if a corporate guarantee is issued, say for a period of one year and is renewed five times, for a period of one year each, then tax would be payable on one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher, on the issue of such corporate guarantee in the first year as well as on every renewal in subsequent years

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Issue No. 5 : Whether the benefit of second proviso to sub-rule (1), which states that value declared in invoice is deemed to be the open market value in cases where full input tax credit is available to the recipient of services, is not applicable in cases falling under sub-rule (2)?

Clarification : Proviso has been inserted in sub-rule (2) of Rule 28 of CGST Rules, retrospectively with effect from 26th October 2023 vide notification No. 12/2024 – CT dated 10.07.2024, similar to that provided in the second proviso to sub-rule (1) of Rule 28 of CGST Rules, to provide the benefit in cases involving supply of service of corporate guarantees provided between related persons. Accordingly, it is clarified that in cases involving the supply of service of corporate guarantees provided between related persons, where full input tax credit is available to the recipient of services, the value declared in the invoice shall be deemed to be the value of supply of the said service.

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Issue No. 6 : Whether the valuation in terms of Rule 28(2) of CGST Rules will apply to the export of the service of providing corporate guarantee between related persons?

Clarification : As per the amendment done in sub-rule (2) of rule 28 of CGST Rules retrospectively w.e.f. 26th October 2023 vide notification No. 12/2024 -CT dated 10.07.2024, the provisions of the said sub-rule will not apply in cases where the recipient of the services of providing corporate guarantee between related persons is located outside India. Accordingly, the provisions of the said sub-rule shall not apply to the export of the services of providing corporate guarantee between related persons.

Refer circular for more detail (click here)

The Bombay High Court has held that D.P. Jain & Co. Infrastructure Pvt. Ltd. cannot be subjected to GST for corporate guarantees it issued to State Bank of India and Bank of Maharashtra to secure loans granted to its group companies, as the company received no consideration for furnishing those guarantees.

A Division Bench of Justice Urmila Joshi-Phalke and Justice Nivedita P. Mehta observed: “There was no flow of consideration for the rendering of services. Therefore, taxability does not arise There was no consideration for the corporate guarantees were issued by the Petitioner on behalf of the companies.” 

The court relied on the Supreme Court’s ruling in Commissioner of CGST & Central Excise v Edelweiss Financial Services Ltd. to hold that issuance of corporate guarantees without consideration would not fall within the ambit of taxable service.

The Court noted: “Admittedly, all three corporate guarantees in the present case, wherein specific clause is “the corporate guarantor hereby declares and agrees that the corporate guarantor has not received and shall not receive any security, fee, commission or any other consideration from the borrower for giving this deed so long as any monies remain due and payable by the borrower to the lender under the common loan agreement and the other finance documents”. 

This clause itself shows that, the supply was not for consideration”

D.P. Jain & Co. Infrastructure Pvt. Ltd., engaged in highway infrastructure construction, had furnished corporate guarantees for loans extended to related entities executing infrastructure projects, including DPJ Pollachi HAM Project Pvt. Ltd., D.P. Jain Bangalore Chennai Expressways Pvt. Ltd., and D.P. Jain TOT Toll Roads Pvt. Ltd.

The guarantee deeds expressly stated that D.P. Jain had neither received nor would receive any security, fee, commission, or other consideration for furnishing the guarantees.

The company told the Court that State Tax authorities had earlier investigated it for the period 2017–18 to 2022–23, examined its books, financial statements, and guarantee documents, but did not raise any GST demand on the guarantees.

Subsequently, the Directorate General of GST Intelligence initiated fresh proceedings alleging non-payment of GST. During the dispute, the Centre inserted Rule 28(2) in the CGST Rules through a 2023 notification and later issued a circular stating that corporate guarantees provided by a person on behalf of related entities, including by a holding company for a subsidiary, would be treated as taxable supply of service even without consideration.

D.P. Jain challenged the proceedings, the circulars, and the amended rule, arguing that GST could not be imposed where there was no consideration, and that a circular could not create a tax liability not contemplated by the statute.

The Court noted that the petitioner was not in the business of commercially providing guarantees and distinguished corporate guarantees from bank guarantees issued in the ordinary course of banking business. “Corporate guarantee is actually an in-house guarantee and is not issued to customers generally.” 

The Court said such guarantees are often issued by group entities to safeguard the financial health of associate enterprises rather than as a commercial service rendered for payment.

Relying on Edelweiss, the court held that taxability requires a flow of consideration for rendering the service. Since the guarantee deeds recorded the absence of consideration, and in light of the Supreme Court’s ruling, the proceedings could not be sustained.

[Refer Detail case law (Click here)]

→ SAC Code :

997113 : Credit-granting services including stand-by commitment, guarantees & securities

GST rate : 18%

CASE STUDY :

Meridian Healthcare Group

Consider the following group structure:

Meridian Healthcare Holdings Private Limited (Holding Company) owns 100% of the equity shares of Meridian Multi-Speciality Hospital Private Limited (Subsidiary Company).

Both companies are registered under GST in Gurugram, Haryana.

The subsidiary is planning to expand its hospital infrastructure and approaches a bank for financial assistance.

Transaction Details

Particulars	Details
Holding Company	Meridian Healthcare Holdings Pvt. Ltd.
Subsidiary Company	Meridian Multi-Speciality Hospital Pvt. Ltd.
Bank	HDFC Bank
Loan sanctioned	₹30 crore
Actual loan disbursed initially	₹24 crore
Corporate guarantee provided by holding company	₹36 crore
Guarantee period	4 years
Guarantee commission charged	Nil
GST registration	Both in Haryana

To secure the loan facility, Meridian Healthcare Holdings Pvt. Ltd. executes a corporate guarantee in favour of HDFC Bank for ₹36 crore.

The holding company does not charge any separate commission or fee from its subsidiary.

Question: Whether GST is payable on this corporate guarantee even though no consideration has been charged?

3. Why Does This Transaction Become Taxable?

The answer lies in the combined application of the following provisions:

Section 7 of the CGST Act, 2017

Section 7 provides the scope of supply under GST.

Entry 2 of Schedule I

Entry 2 provides that the supply of goods or services between related persons, when made in the course or furtherance of business, is treated as supply even if made without consideration.

Related Persons – Section 15 of the CGST Act

Since Meridian Healthcare Holdings Pvt. Ltd. controls its subsidiary, the two entities fall within the definition of related persons under the Explanation to Section 15.

Accordingly, the absence of any guarantee commission does not, by itself, take the transaction outside the scope of GST.

The specific treatment of corporate guarantees between related persons has also been clarified by CBIC through Circular No. 204/16/2023-GST dated 27 October 2023.

4. Valuation Under Rule 28(2) – The Most Important Calculation

To address valuation disputes concerning corporate guarantees, the Government inserted Rule 28(2) through Notification No. 52/2023-Central Tax dated 26 October 2023.

Subsequently, Notification No. 12/2024-Central Tax dated 10 July 2024 amended the provision retrospectively with effect from 26 October 2023.

Under the current Rule 28(2), the value of the specified corporate guarantee service is generally:

1% of the amount of guarantee offered per annum OR actual consideration, whichever is higher.

However, a proviso provides that where the recipient is eligible for full input tax credit, the value declared in the invoice is deemed to be the value of supply.

Applying Rule 28(2) to Meridian Healthcare Group

For this example, assume that the subsidiary provides exempt healthcare services along with taxable supplies and is not eligible for full ITC on the corporate guarantee service.

Particulars	Amount
Corporate guarantee amount	₹36,00,00,000
Prescribed valuation rate	1% per annum
Guarantee tenure	4 years
Value per annum	₹36,00,000
Value for four years	₹1,44,00,000
Actual consideration charged	NIL
Taxable value	₹1,44,00,000

Thus, the taxable value is ₹1.44 crore.

5. GST Calculation

Corporate guarantee service falls under SAC 997113, being credit-granting services including guarantees and securities.

The applicable GST rate is 18%.

Since both companies are registered in Haryana, the transaction is an intra-State supply.

Particulars	Amount
Taxable value	₹1,44,00,000
CGST @ 9%	₹12,96,000
SGST @ 9%	₹12,96,000
Total GST Liability	₹25,92,000
Total Invoice Value	₹1,69,92,000

Result: Meridian Healthcare Holdings Pvt. Ltd. is required to discharge GST of ₹25.92 lakh, notwithstanding that it has not charged any actual guarantee commission.

6. Does Actual Loan Disbursement Affect GST Valuation?

An important practical issue arises here.

The bank has sanctioned a loan of ₹30 crore, but only ₹24 crore has actually been disbursed to the subsidiary.

Should GST be calculated on ₹24 crore or ₹36 crore?

The answer is ₹36 crore, being the amount guaranteed, subject to the applicable valuation provisions.

CBIC, through Circular No. 225/19/2024-GST dated 11 July 2024, clarified that corporate guarantee valuation is based on the amount guaranteed and not on the amount of loan actually disbursed.

The reason is that the guarantor undertakes the risk of default in respect of the guaranteed amount.

Therefore, in the present case, the fact that only ₹24 crore has been disbursed does not reduce the valuation base of ₹36 crore.

7. When Is GST Payable: Annually or Once at the Time of Guarantee?

This is another important clarification provided by CBIC.

Where a corporate guarantee is issued for a fixed tenure of four years, the valuation is calculated at 1% per annum multiplied by four years.

Accordingly, GST is payable on the aggregate value of the guarantee service at the time of issuance of the corporate guarantee.

In the present example:

Guarantee issued for four years.

Valuation: 4% of ₹36 crore.

Taxable value: ₹1.44 crore.

GST: ₹25.92 lakh.

However, where a guarantee is issued for one year and renewed in each subsequent year, the valuation and GST liability arise on each issuance or renewal.

This position is specifically clarified in Circular No. 225/19/2024-GST.

8. Who Pays GST: Holding Company or Subsidiary?

Where both guarantor and recipient are domestic companies, GST is payable under the Forward Charge Mechanism (FCM).

Accordingly:

Meridian Healthcare Holdings Pvt. Ltd. is the supplier of the service.

Meridian Multi-Speciality Hospital Pvt. Ltd. is the recipient.

The holding company must issue the tax invoice under Section 31 of the CGST Act.

The holding company must discharge the applicable GST liability.

The subsidiary may claim ITC subject to Sections 16 and 17 of the CGST Act and the applicable rules.

Since the example involves exempt as well as taxable business operations, the availability of ITC must be examined under Section 17(2) read with Rule 42.

9. Situations where a subsidiary cannot claim ITC

Situation	ITC treatment	Legal provision
Subsidiary exclusively provides exempt supplies	No ITC	Section 17(2)
Corporate guarantee is exclusively used for exempt business activities	No ITC on such service	Section 17(2), Rule 42
Guarantee service is used for both taxable and exempt activities	Proportionate ITC only	Section 17(2), Rule 42
Subsidiary is under Composition Scheme	No ITC	Section 10(4)
Corporate guarantee is not used for business purposes	ITC restricted	Section 17(1)
Conditions prescribed under Section 16 are not fulfilled	ITC unavailable until conditions are satisfied	Section 16(2)

Important: Corporate guarantee services are not independently classified as blocked credits under Section 17(5). The major restrictions generally arise from exempt supply, non-business use and non-fulfilment of Section 16 conditions.

Meridian Healthcare Holdings Pvt. Ltd. provides a corporate guarantee of ₹36 crore to HDFC Bank for its subsidiary, Meridian Multi-Speciality Hospital Pvt. Ltd.

The subsidiary uses the loan for hospital infrastructure.

The guarantee is provided for four years without charging any commission.

Particulars	Amount
Corporate guarantee	₹36 crore
Valuation @ 1% × 4 years	₹1.44 crore
GST @ 18%	₹25.92 lakh

Now consider three different situations.

Case A: Subsidiary provides exclusively exempt healthcare services

Suppose Meridian Multi-Speciality Hospital Pvt. Ltd. provides only qualifying exempt healthcare services covered under Entry 74 of Notification No. 12/2017-Central Tax (Rate).

The loan is used exclusively for providing these exempt healthcare services.

GST treatment:

GST on corporate guarantee: ₹25.92 lakh.

ITC eligible: Nil.

Entire ₹25.92 lakh is ineligible under Section 17(2).

Case B: Subsidiary provides both taxable and exempt supplies

Suppose the hospital has the following turnover:

Particulars	Turnover
Exempt healthcare services	₹70 crore
Taxable supplies	₹30 crore
Total turnover	₹100 crore

Assume the corporate guarantee service is a common input service used for both business activities.

ITC calculation under Rule 42:

Particulars	Amount
Total GST on corporate guarantee	₹25,92,000
Exempt turnover ratio	70%
ITC reversal (70%)	₹18,14,400
Eligible ITC (30%)	₹7,77,600

Therefore, the subsidiary can claim only ₹7,77,600 as ITC, subject to the other statutory conditions.

Case C: Subsidiary provides exclusively taxable supplies

Suppose the subsidiary is engaged exclusively in taxable pharmaceutical manufacturing and the guarantee service is used for its taxable business.

In this situation:

GST paid: ₹25.92 lakh.

ITC eligible: ₹25.92 lakh.

No proportionate reversal is required, subject to Section 16.

Further, where the recipient is eligible for full ITC, the proviso to Rule 28(2) applies: the value declared in the invoice is deemed to be the value of supply. Accordingly, the 1% valuation mechanism should not be mechanically applied in this case.

10. Accounting entries in holding company’s books under AS

A. On the date of issuance of corporate guarantee

The holding company is required to issue a GST invoice and discharge GST under the Forward Charge Mechanism.

Journal Entry:

Particulars	Debit (₹)	Credit (₹)
GST Expense on Corporate Guarantee A/c Dr.	25,92,000	—
To Output CGST Payable A/c	—	12,96,000
To Output SGST Payable A/c	—	12,96,000
Total	25,92,000	25,92,000

Why is GST debited to the Profit & Loss Account?

Because:

The holding company has not charged any guarantee commission.

It has incurred an actual statutory tax liability.

The GST is not an input tax credit available to the holding company.

Assuming there is no contractual right to recover this amount from the subsidiary, it represents an expense for the holding company.

It may be classified under Other Expenses – Taxes and Duties / GST on Corporate Guarantee.

B. When GST is paid to the Government

Particulars	Debit (₹)	Credit (₹)
Output CGST Payable A/c Dr.	12,96,000	—
Output SGST Payable A/c Dr.	12,96,000	—
To Bank A/c	—	25,92,000

After payment, the output GST liability stands settled.

11. What about the ₹1.44 crore taxable value? Is it recorded as revenue?

Important accounting distinction
No. The deemed taxable value under Rule 28(2) does not automatically become accounting revenue under AS 9.

AS 9 defines revenue by reference to the gross inflow of cash, receivables or other consideration arising from ordinary activities.

In our example, the holding company has not charged any commission and has no contractual right to receive ₹1.44 crore.

Therefore:

Particulars	GST records	Financial books under AS
Deemed taxable value ₹1.44 crore	Report as taxable value	No automatic revenue
GST ₹25.92 lakh	Output tax liability	Expense and GST payable
Corporate guarantee ₹36 crore	Basis for valuation	Contingent liability disclosure, subject to AS 29

12. What about the corporate guarantee of ₹36 crore itself?

This is separately governed by AS 29 – Provisions, Contingent Liabilities and Contingent Assets.

At the time of issuing the guarantee, assuming the subsidiary is financially sound and an outflow is not probable:

No journal entry for the guarantee obligation itself.

Disclose ₹36 crore as a contingent liability under Guarantees in the Notes to Accounts.

However, where an outflow becomes probable and can be reliably estimated, recognise a provision under paragraphs 14 and 26 of AS 29. The standard’s Illustration 7 specifically deals with a guarantee issued on behalf of another enterprise.