Corporate Guarantees under GST: Supply from Solidarity to Statutory Service

Summary: Corporate guarantees between related entities have moved from a consideration-based service tax framework to a deemed-supply regime under GST. Under service tax, the article discusses DLF Home Developers Ltd. and Commissioner, CGST & Central Excise v. Edelweiss Financial Services Ltd. as supporting the proposition that consideration was essential and that valuation machinery could not create a taxable service where no consideration existed. Under GST, however, Section 7 of the CGST Act read with Schedule I brings specified supplies between related persons within GST even without consideration. Valuation is consequently governed by Section 15 and the CGST Rules. For guarantees issued or renewed from 01.07.2017 to 25.10.2023, the article applies the general Rule 28 framework, including the full-ITC invoice-value proviso. Notification No. 52/2023-Central Tax dated 26.10.2023 inserted Rule 28(2), prescribing 1% of the guarantee amount or actual consideration, whichever is higher. Circular No. 204/16/2023-GST dated 27.10.2023 clarified personal and corporate guarantee issues. Notification No. 12/2024-Central Tax dated 10.07.2024, with effect from 26.10.2023, refined Rule 28(2), including the per-annum basis and full-ITC treatment, while Circular No. 225/19/2024-GST dated 11.07.2024 addressed valuation periods, renewals and other implementation issues. The article further discusses overseas recipients and the separate conditions for export of services under the IGST Act. Finally, Torrent Power Ltd. v. Union of India & Ors. is discussed as confirming GST taxability of gratuitous intra-group guarantees while reading down the mandatory “whichever is higher” formulation and addressing the operation of Rule 28(2) from 26.10.2023.

Corporate guarantees sit at an unusual crossroads with reference to Indirect Tax laws in India. What generally begins as a simple act of financial solidarity within a corporate group i.e., a parent company standing behind a subsidiary’s borrowings to bridge a financial integrity can turn into a genuinely difficult question of taxability and valuation, once the transaction is examined through the lens of service tax earlier and now, GST. The law on this subject has also shifted meaningfully over the period of time, so any analysis has to be built in different layers of time. First it would be of utmost necessity for understanding what a corporate guarantee actually is, commercially, then tracing how it was treated under service tax and finally after introduction of GST, working through the two distinct phases of its treatment i.e., before and after the special valuation mechanism was introduced in October 2023. An attempt in this direction has been made which draws together both strands of that analysis: the commercial and jurisprudential foundation of corporate guarantees, and the detailed valuation framework that GST law eventually settled into.

Understanding the Transaction Before the Tax

2. Companies within a group are rarely as separate, commercially speaking, as their individual legal identities suggest. It is more of a euphemism than reality. A holding company often sets up subsidiaries for different projects, regions, or business lines, and even though each subsidiary is its own legal person, it frequently leans on the parent’s financial strength to raise its capital. Banks and lenders, wary of a newer or smaller entity’s independent credit profile, will often insist that a stronger group company guarantee the borrowing. A corporate guarantee is the instrument that formalises this support i.e., one company (the guarantor) promises to step in and meet another group company’s financial obligations if that company defaults. The borrower remains primarily liable; the guarantor’s obligation is contingent and only crystallises on default.

Three-Party Structure and Its GST Relevance

3. This structure typically involves three parties i.e., the borrower, the lender, and the guarantor and it’s worth noting that although the guarantee by the guarantor runs to the bank, it is given on behalf of the borrowing company. That three-cornered relationship turns out to matter a great deal under GST, one on taxability under Section 7 of CGST Act read with Schedule I, para (2), Schedule II Para 5 (e) and also valuation since Rule 28(2) of the CGST Rules 2017 is built specifically around it.

Why No Fee Is Charged?

4. The intriguing question that is generally asked is Why No Fee Is Charged? A recurring feature of these arrangements is that the parent typically charges no commission for the guarantee. The commercial logic is quite straightforward. Extend a helping hand to the subsidiary to succeed which benefits the group as a whole, through improved profitability, a stronger investment, and overall group strength. The absence of a fee doesn’t mean the guarantee is commercially meaningless, it simply reflects how integrated corporate groups tend to operate. But it does raise the central tax question this whole subject turns on. Can something be taxed when nothing is charged for it? The answer differs sharply between the service tax era and the GST era and that difference is the crux of the corporate guarantee litigation.

Corporate Guarantee vs Bank Guarantee vs Personal Guarantee

5. It helps to separate corporate guarantees from two similarly named instruments. A bank guarantee which is issued by a bank, for a fee, as part of its ordinary commercial business. A corporate guarantee, by contrast, is usually given by one group company for another and issuing guarantees is not that company’s regular line of business. The honourable Bombay High Court in the case of M/s D.P. Jain & Co. Infrastructure Pvt. Ltd. v. Union of India & Ors. (Writ Petition No. 2087 of 2025, decided on 06.05.2026), drew out this distinction, characterising an intra-group corporate guarantee as essentially an “in-house” arrangement rather than a service offered to customers generally.

6. A corporate guarantee is also distinct from a personal guarantee given by an individual director or promoter a difference that CBIC Circular No. 204/16/2023-GST, dated 27.10.2023 brought out separately, because the two carry materially different GST valuation consequences even though both provide comfort to a lender.

Related Persons and Section 15

7. The reason the guarantor-borrower relationship matters so much is because, Section 15 of the CGST Act, 2017, whose explanation defines Transaction Value differently, when persons are treated as “related.” This goes beyond family or partnership ties and captures specified ownership and control relationships including, typically, a holding company and its subsidiary. Once two entities fall within this definition of “Related Person”, an intra-group transaction can’t simply be assessed the way an arm’s-length deal between strangers would be. This has consequences both for whether the transaction counts as a “supply” at all, and for how it is valued.

8. Let us consider an illustration: M/s. ABC Ltd., the holding company of M/s.PQR Ltd., furnishes a corporate guarantee so that M/s.PQR Ltd. can secure a bank loan, and charges no commission for doing so. The fact that no consideration changed hands is significant but under GST, because M/s. ABC Limited and M/s. PQR Limited, are related persons, that fact alone doesn’t end the inquiry here.

The Schedule I Fiction: A Supply Even Without Consideration

9. The provisions of Section 7 of the CGST Act defines “supply,” but it must be read together with Schedule I, which deems certain transactions to be supplies even when no consideration is charged. Paragraph 2 of Schedule I specifically captures supplies between related persons made in the course of business.

ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION

(1) Permanent transfer or disposal of business assets …………….

(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:

This is a real departure from the ordinary commercial instinct that tax should track the price (i.e., consideration whether monetary or non-Monetary) actually charged Parliament’s view being that related parties may simply not charge each other what unrelated parties would.

8. This is exactly the situation a corporate guarantee typically falls into. A parent holding company may genuinely charge nothing but if the Schedule I (para:2) conditions are met, that doesn’t take the arrangement outside GST. It becomes a Taxable Supply. It does, however, open up a second and much harder question to answer:

what value do you assign for assessment purposes to something for which the parties agreed no price at all?

That’s where taxability and valuation, which need to be kept conceptually distinct, come apart.

Taxability and Valuation

Service Tax: Consideration as a Threshold Requirement

9. It’s worth stressing that “is this a taxable supply?” and “what is it worth for tax purposes?” are separate questions, arising at different stages. This distinction was central to the older service tax regime. In terms of clause (44) of Section 65B of the Finance Act, 1994 which defined a taxable service around an activity carried out for consideration. If there was no consideration, the service itself failed to meet the statutory definition becoming non-taxable and a valuation rule, cannot manufacture the consideration needed to establish the service in the first place. The CESTAT Chandigarh reinforced this principle in DLF Home Developers Ltd. v. Commissioner of Central Excise, Goods & Service Tax, Gurugram (2026 (7) TMI 373), rejecting the department’s attempt to impute a notional guarantee commission where none had actually been charged.

Edelweiss Financial Services and Free Intra-Group Guarantees

10. The leading authority here is the resolution of the litigation in the case of Commissioner, CGST & Central Excise v. Edelweiss Financial Services Ltd. (CESTAT Mumbai, Final Order No. A/85986/2022, dated 16.02.2022), later affirmed by the Supreme Court in Commissioner of CGST & Central Excise v. Edelweiss Financial Services Ltd. decided on 17.03.2023, in fact after introduction of GST but with reference to beforehand Service Tax leviability. A Group guarantee that had been furnished without any fee, and the Tribunal held that consideration was an essential ingredient of a taxable service under clause (44) of Section 65B, non-monetary benefits might be relevant to valuation, but they could not substitute for consideration in establishing that the provision of service existed at all. The honourable Supreme Court declined to disturb this, noting that free intra-group guarantees did not amount to a taxable service. The dispute decided in the case of M/s. DLF Home Developers followed the same logic. Even the possibility that a guarantee helped a group company borrow on better terms could not, by itself, be treated as consideration flowing to the guarantor. Under service tax, then, valuation could measure an existing taxable service but could never conjure one into existence of taxable activity.

How GST Changed the Equation

11. GST altered this framework fundamentally. Where service tax required consideration as a threshold condition, Schedule I (para:2) under GST expressly has brought certain related-party supplies within tax even without consideration. So, a guarantee deed stating “no commission payable” doesn’t settle the GST question the way it might have settled a service tax dispute — the first question is simply whether Section 7 read with Schedule I is satisfied, and if it is, attention shifts entirely to Section 15 and the applicable valuation rules.

12. This is also why the litigation under GST took a different shape from the service tax controversy. Even once taxability was accepted under the related-person deemed fiction, there was real uncertainty about value. The original Rule 28 offered a general related-party valuation mechanism, but it wasn’t built with the peculiarities associated with corporate guarantees in mind which is what eventually prompted the introduction of the special Rule 28(2) mechanism from 26.10.2023.

Two Distinct Valuation Phases

13. Once a corporate guarantee is accepted as a taxable supply under GST, the practical challenge becomes valuation. This has to be examined in two distinct phases. One from 01.07.2017 to 25.10.2023, when only the general Rule 28 applied, and second from 26.10.2023 onwards, when a dedicated mechanism under Rule 28(2) took over which later was refined through retrospective amendment and CBIC clarification.

Valuation from 01.07.2017 to 25.10.2023

14. Before October 2023, there was no custom-made valuation rule for corporate guarantees. Where a related-party guarantee was treated as a supply under Schedule I, its value fell to be determined under the general cascade in Rule 28 i.e. open market value first, then value of like-kind supplies, and failing those, Rules 30 or 31. Crucially, where the recipient was entitled to full input tax credit, the invoice value itself was deemed to be the open market value. Applying this general framework to corporate guarantees, however, proved awkward. A bank guarantee commission set by a commercial lender pricing credit risk, security, tenure and so on is not really comparable to an intra-group guarantee given primarily to support a subsidiary’s success. Treating a bank’s commercial rate as a stand-in “open market value” for a free intra-group guarantee was itself a source of dispute, and no fixed percentage or formula existed to resolve it which is precisely the gap Rule 28(2) was later designed to bridge. The full-ITC proviso under the original Rule 28 remains relevant for guarantees issued or renewed before 26.10.2023 and Circular No. 225/19/2024-GST (dated 11.07.2024) confirms such guarantees continue to be valued under the old Rule 28 framework, not under the newer one per cent mechanism.

Rule 28(2): Special Corporate Guarantee Valuation

15. The Rule 28(2) Mechanism the Notification No. 52/2023-Central Tax (dated 26.10.2023) inserted Rule 28(2), introducing for the first time a dedicated valuation formula for corporate guarantees furnished to banks or financial institutions on behalf of related persons which fixed one per cent of the guaranteed amount, or the actual consideration, whichever is higher. Circular No. 204/16/2023-GST explained this was meant to resolve inconsistent valuation practices across the field. That circular initially also said the rule would apply even where the recipient had full ITC available a position later reconsidered after insertion of a second proviso vide Notification No: 12/2024, Central Tax, dated 10-07-2024, but with effect from 26-10-2023.

One Per Cent Per Annum and Part-Year Valuation

16. The original wording left open whether the one per cent applied once for the guarantee’s whole life, or annually. Using a five-year, ₹100-crore guarantee as an example, a one-time application produces a very different number from an annual one. Notification No. 12/2024-Central Tax (dated 10.07.2024) resolved this retrospectively (effective from 26.10.2023 itself) by clarifying the benchmark is a per annum figure, with Circular No. 225/19/2024-GST adding that part-year periods are valued proportionately. The circular also clarified that the guarantor’s exposure and hence the valuation base is the full guaranteed amount, regardless of how much of the underlying loan is actually drawn. A ₹100-crore guarantee is valued on ₹100 crore even if only ₹60 crore is ever borrowed.

Changes in Guaranteed Amount and Renewals

17. So, Changes in the guaranteed amount, i.e., where the guaranteed sum is increased, reduced, or the guarantee is renewed during its term, valuation must track the amount actually guaranteed for each relevant period making the underlying documentation genuinely important, since getting the amount or period wrong misapplies the one per cent formula. A guarantee originally issued earlier doesn’t automatically attract the special rule just because it continues past that date, but a renewal on or after that date does. The precise issuance and renewal dates therefore become decisive facts.

Full ITC and Invoice Value

18. The initial position (per Circular No. 204/16/2023-GST) applied Rule 28(2) even to full-ITC recipients, creating an odd asymmetry with ordinary Rule 28(1) related-party transactions, which enjoyed invoice-value treatment in full-ITC cases. Notification No. 12/2024-Central Tax fixed this retrospectively from 26.10.2023 and Circular No. 225/19/2024-GST confirmed that where the recipient has full ITC, the invoice value is deemed to be the value of supply. This matters much because, in fully taxable related-party transactions, the GST paid by the guarantor in our case, is typically available as credit to the recipient making the transaction largely revenue-neutral, so a rigid one percent benchmark served very little or no purpose there.

When Actual Consideration Is Higher

19. When actual consideration is higher, the rule works both ways. If actual consideration charged exceeds the one per cent benchmark, the higher figure governs. For instance, if M/s. ABC Limited, guarantees ₹50 crore and charges ₹75 lakh, that exceeds one per cent (₹50 lakh), so the actual ₹75 lakh consideration is what matters. This stops related parties from using the deemed formula to artificially deflate a genuinely higher commercial charge, while the full-ITC carve-out separately defuses disputes that serve little revenue interest.

Corporate Guarantees Where Recipient Is Outside India

20. The 2024 amendment to Rule 28(2) of CGST Rules, 2017, carved out corporate guarantees where the recipient is located outside India, the one per cent per annum formula simply doesn’t apply to these situations. That exclusion, though, doesn’t automatically mean the transaction is exempt; it must still independently satisfy the conditions for export of services under the IGST Act, 2017. So, only if the Guarantor is located outside India and the creditor Recipient is located in India the Rule 28(2) shall apply. The rule does not apply when the recipient is outside India.

Why 26.10.2023 Is the Critical Date

21. One aspect that requires clear comprehension is that because the rules genuinely differ, guarantees issued or renewed before 26.10.2023 stay under the old Rule 28 approach, and only those issued or renewed on or after that date fall under Rule 28(2). Applying the one per cent per annum formula retroactively to earlier guarantees is a legal error.

Key Factors Determining Corporate Guarantee Valuation

22. Even with Rule 28(2) in place, corporate guarantee valuation isn’t a mechanical one per cent calculation. The date and duration of the guarantee, the amount actually guaranteed, whether real consideration was charged, whether the recipient enjoys full ITC, and where the recipient is located can each change the outcome. Each case has to be checked against its own documentation and against the law and the contractual obligations as it stood at the relevant material time.

The Decision of Honourable Gujarat High Court Weighs In: Torrent Power Ltd.

23. Much of the uncertainty discussed above was tested directly before the Gujarat High Court in Torrent Power Ltd. v. Union of India & Ors. (R/Special Civil Application No. 12175 of 2024, with connected petitions), decided in August 2026. A batch of writ petitions challenged the constitutional and statutory validity of Rule 28(2) of the CGST Rules, Section 15(4) of the CGST Act, and the two CBIC circulars discussed above (No. 204/16/2023-GST and No. 225/19/2024-GST), in the context of parent companies furnishing free guarantees for subsidiary borrowings.

Questions Before the Gujarat High Court

24. Three questions were at the heart of the litigation. First, whether a gratuitous corporate guarantee is a taxable “supply of service” at all under Section 7(1)(c) read with Schedule I (Entry 2) and Schedule II (Entry 5(e)), or whether it should instead be treated as a non-taxable “actionable claim” or mere shareholder activity; second, whether the mandatory 1% per annum deemed valuation under Rule 28(2) exceeded the rule-making power and offended Articles 14, 19(1)(g) and 265 of the Constitution; and third, whether the levy could reach guarantees executed before Rule 28(2) came into force on 26.10.2023.

Contentions of the Petitioners

25. The appellants argued that a corporate guarantee is a contingent, tripartite arrangement under Section 126 of the Indian Contract Act, 1872, involving no independent service flowing between parent and subsidiary and that gratuitous guarantees, being essentially shareholder or investment activity aimed at protecting an equity stake, should not be taxable at all. They characterised the guarantor’s contingent liability as a “debt” under Article 366(8) of the Constitution and hence an actionable claim excluded from GST under Schedule III, and argued that pledged shares, being “securities,” fall outside the statutory definitions of goods and services altogether. On valuation, they contended that a flat mandatory 1% benchmark well above the 0.25%–0.5% range typical of actual bank guarantee commissions and applied even where no cost was incurred at all was confiscatory and arbitrary, and that applying it retrospectively impaired vested rights.

Government’s Contentions

26. The government’s position was that Section 7(1)(c) read with Schedule I, Entry 2, was specifically designed to capture related-party transactions made without consideration, and that furnishing a guarantee amounts to agreeing to an obligation to do an act under Schedule II, Entry 5(e). It emphasised that the guarantee directly enables the subsidiary to access credit, that the wide definition of “business” under Section 2(17) covers incidental or ancillary activity regardless of frequency or profit motive, and that a guarantor’s secondary, default-contingent promise is fundamentally different from a debtor’s obligation and so cannot be an actionable claim. It further argued that Sections 15(4), 15(5) and 164 expressly empower the government, on the GST Council’s recommendation, to prescribe special valuation mechanisms precisely to resolve difficulties of this nature.

Findings of the Gujarat High Court

27. The Gujarat High Court partly allowed the petitions, arriving at a calibrated middle position.

a. Taxability was confirmed. A holding company’s free corporate guarantee for its subsidiary is a taxable supply of services between related persons under Section 7(1)(c) read with Schedule I (Entry 2) and Schedule II (Entry 5(e)).

b. The Court held that a guarantee generates only a secondary, contingent liability and does not qualify as an actionable claim under Schedule III or the Transfer of Property Act, pledging shares as security for the guarantee was treated as integral to that supply rather than an independent, excluded transaction in securities.

c. The Court sustained the constitutional and statutory validity of Section 15(4) and Rule 28(2) generally but read down the “whichever is higher” formulation as arbitrary under Articles 14 and 19(1)(g) of the Constitution. Taxpayers who can show a genuine, lower actual consideration or commission cannot be compelled to pay GST on the deemed 1% figure instead.

d. Applying the 1% deemed valuation to guarantees predating Rule 28(2) was held to violate Articles 14 and 19(1)(g); the mechanism validly applies only from 26.10.2023 onward, including to guarantees that were already subsisting on that date.

Impact of Torrent Power Ltd.

Torrent Power case settles, at least at the level of a High Court, that a gratuitous intra-group guarantee remains a taxable supply under GST while the shareholder-activity and actionable-claim defences do not succeed. At the same time, by reading down “whichever is higher,” the Court took away the rigidity of a flat 1% floor: a taxpayer actually charging a bona fide, lower guarantee commission is no longer forced to gross that figure up to the deemed benchmark and by confining the levy to guarantees issued or subsisting from 26.10.2023, the Court foreclosed retrospective demands built on the 1% formula for the pre-Rule 28(2) period reinforcing, from a constitutional angle, the period-wise approach that Circular No. 225/19/2024-GST had already adopted administratively.

Before Bidding Adieu…….

28. The trajectory of corporate guarantees under Indian indirect tax law illustrates how a straightforward act of intra-group support can generate real legal complexity once a related-person deemed fiction enters the picture. Under service tax, the Edelweiss and DLF Home Developers decisions held the line that consideration was indispensable to a taxable service while a notional commission could not be invented to create tax liability where none had actually been charged. GST broke from that position decisively: Schedule I brings specified related-party transactions, including corporate guarantees, within the scope of “supply” even when nothing is charged, shifting the real battleground from whether tax applies to how much.

29. The valuation question itself had to be worked out in two phases. From July 2017 to October 2023, corporate guarantees were valued under the general, Rule 28 framework, with the full-ITC invoice value relaxation offering some relief. From 26.10.2023, Rule 28(2) introduced a dedicated one per cent per annum benchmark which itself refined through 2024 amendments to confirm its annual character, restore full-ITC relief, and exclude overseas recipients, all clarified in detail by Circular No. 225/19/2024-GST on issues ranging from renewals to partial disbursement.

30. Ultimately, the value of a corporate guarantee under GST depends on more than the guaranteed sum alone. It turns on when the guarantee was issued or renewed, how long it runs, whether any consideration was actually charged, whether the recipient has full ITC, and where the recipient is located. Once these threshold questions are worked through methodically, an area of law that looks forbidding at first glance resolves into a reasonably structured and predictable framework.

Jai Hind !!!!!!