GST on Corporate Guarantees: Taxability, Valuation & Trends

Summary: Corporate guarantees have become an integral feature of modern business financing structures, particularly within corporate groups. By leveraging the financial strength, creditworthiness, and brand value of established entities, group companies are often able to secure borrowing at more favourable terms and lower interest costs. Despite their widespread commercial use, the GST treatment of corporate guarantees has remained a subject of significant interpretational debate. The introduction of specific taxability and valuation rules notified on 26th October 2023 has further intensified discussions around their characterization as a supply, valuation methodology and overall alignment with commercial realities. This research paper examines the legal framework governing corporate guarantees under GST, including Section 7 of the CGST Act, Schedule I transactions between related persons, valuation under Rule 28(2), CBIC clarifications, export of services implications and the evolving judicial and administrative jurisprudence.

1. Introduction

Corporate guarantees have become an integral feature of modern business financing structures, particularly within corporate groups. By leveraging the financial strength, creditworthiness, and brand value of established entities, group companies are often able to secure borrowing at more favourable terms and lower interest costs. Despite their widespread commercial use, the GST treatment of corporate guarantees has remained a subject of significant interpretational debate. The introduction of specific taxability and valuation rules notified on 26th October 2023 has further intensified discussions around their characterization as a supply, valuation methodology and overall alignment with commercial realities.

This research paper critically examines the legal framework governing corporate guarantees under GST, with particular emphasis on the scope of “supply” under Section 7 of the CGST Act, the application of Schedule I transactions between related persons, and the fundamental requirement of consideration in determining taxability. The study further analyses the position adopted by tax authorities, including the implications of relevant notifications, amendments, and circulars issued by the Government and the GST Council. Particular attention is given to the valuation mechanism prescribed for corporate guarantees and the practical challenges arising from its implementation, including questions relating to deemed valuation, economic substance and consistency with established GST principles.

In addition, the paper reviews the evolving judicial and administrative jurisprudence surrounding corporate guarantees, including significant decisions rendered under both the pre-GST and GST regimes. The analysis identifies key legal principles and emerging trends that are likely to shape future litigation and policy developments.

2. Understanding Corporate Guarantees: Commercial and Legal Perspective

Meaning of Corporate Guarantee:

The term “Corporate Guarantee” has not been specifically defined under the CGST Act, 2017. Consequently, its meaning may be derived from the general principles governing guarantees under other statutes and regulatory frameworks.

Under Section 126 of the Indian Contract Act, 1872, a contract of guarantee is defined as “a contract to perform the promise, or discharge the liability, of a third person in case of his default.” Accordingly, a corporate guarantee refers to an arrangement whereby a company undertakes to satisfy the obligations of another person or entity in the event of default before the lender or creditor.

Similarly, under the Foreign Exchange Management (Overseas Investment) Regulations, 2022, corporate guarantees commonly arise when an Indian entity provides a guarantee in respect of the financial obligations of its overseas subsidiary, step-down subsidiary, joint venture, or other foreign group entity.

In commercial practice, corporate guarantees are widely used within business groups to enhance the creditworthiness of borrowing entities, enabling them to obtain financing on more favourable terms by leveraging the financial strength, reputation and balance sheet of the guarantor company.

Illustrative Examples of Corporate Guarantees

In essence, a corporate guarantee is a contractual commitment by one company (the guarantor) to meet the obligations of another entity (the principal debtor) towards a lender or creditor upon the occurrence of a specified default. This understanding forms the foundation for analysing its treatment under the GST framework.

Whether a Corporate Guarantee is “Goods” or “Services” under GST?

The Department has taken the view that a corporate guarantee constitutes a supply of service under the GST laws. This classification as a service is founded primarily on Entry 5(e) of Schedule II Section 7, namely, “agreeing to the obligation to do an act”.

Notes: This view has recently received substantial support from the Gujarat High Court in Torrent Power Ltd. v. Union of India (judgment dated 14.08.2026).

The legal position is still evolving and remains subject to further judicial scrutiny, including possible consideration by other High Courts and ultimately the Supreme Court.

Taxability of Corporate Guarantees and its valuation:

• Corporate Guarantees Issued for Consideration to Unrelated Persons: Where a corporate guarantee is issued by a person to an unrelated party in consideration for a commission, fee or any other form of consideration, the transaction would ordinarily qualify as a “supply” under Section 7(1)(a) of the CGST Act, 2017, being a supply of service made for a consideration in the course or furtherance of business. Accordingly, the guarantee commission or fee charged by the guarantor would form the value of the taxable supply, and GST would be leviable on such consideration at the applicable rate. Presently, services relating to the provision of guarantees are generally classifiable under SAC 997113 (Financial and Related Services) and attract GST at 18%.

Illustration

Corporate Guarantees Issued to Related Persons without consideration: In respect of transactions where a person issues a corporate guarantee in favour of another related person without charging any consideration, such transaction would nevertheless fall within the ambit of “supply” in terms of Section 7(1)(c) read with Entry 2 of Schedule I of the CGST Act, 2017, which deems supplies between related persons made in the course or furtherance of business as taxable even in the absence of consideration.

This view has recently received substantial support from the Gujarat High Court in Torrent Power Ltd. v. Union of India & Ors. (Judgment dated 14.08.2026). The Court, in Paragraph 32 (Page 63), held that the rights and obligations arising under Sections 140 and 145 of the Indian Contract Act create the connecting link for treating a corporate guarantee as a supply of service by the holding company to its subsidiary and consequently bring the transaction within the scope of Section 7(1)(c) read with Entry 2 of Schedule I of the CGST Act.

Further, with respect to valuation of corporate guarantees issued without consideration, Rule 28(2) of the CGST Rules was inserted w.e.f. 26.10.2023 vide Notification No. 52/2023-Central Tax dated 26.10.2023, prescribing a deemed valuation mechanism for corporate guarantees provided between related persons. Subsequently, Notification No. 12/2024-Central Tax dated 10.07.2024 (retrospectively effective from 26.10.2023) inserted a proviso that where the recipient is eligible for full Input Tax Credit (ITC), the value declared in the invoice shall be deemed to be the value of such supply.

Illustration 1: Corporate Guarantee without consideration issued by holding company to subsidiary company (recipient not eligible for full ITC)

Thus, where a guarantee of ₹100 crore is provided without consideration, the deemed value of supply shall be ₹1 crore per annum and GST liability would be ₹18 lakh. (i.e. if guarantee issued for 5 years, GST Liability shall be discharged at 5% (1% x 5) of the guarantee amount.)

Illustration 2: Corporate Guarantee issued to related person with actual consideration lower than 1% of Guarantee amount. (recipient not eligible for full ITC)

However, it may be noted that the Gujarat High Court in Torrent Power Ltd. v. Union of India has read down the expression “whichever is higher” contained in Rule 28(2) and held that where actual consideration is ascertainable, valuation may be based on the actual commission charged rather than mandatorily adopting 1% of the guarantee amount. Paras 108-110 and Conclusion Clause A specifically discuss this aspect. It is to be noted that Gujarat HC relied upon Supreme Court in case of Wipro Limited (supra) and Munjaal Manishbhai Bhatt (supra).

Accordingly, applying the principles derived from Torrent Power ruling:

Illustration 3: Recipient eligible for full ITC (Proviso to Rule 28(2) applies)

In such cases, the invoice value itself is deemed to be the taxable value of the supply.

CBIC Circulars on clarifying the position taken by the department

The issue was further addressed by the CBIC through Circular No. 204/16/2023-GST dated 27 October 2023 and subsequently elaborated through Circular No. 225/19/2024-GST dated 11 July 2024.

Circular No. 204/16/2023-GST

Circular No. 204/16/2023-GST clarified two distinct issues, namely the taxability of personal guarantees furnished by directors and corporate guarantees furnished between related entities. In respect of personal guarantees provided by directors to banks or financial institutions for securing credit facilities of the company, the Circular clarified that such activity technically constitutes a supply between related persons under Section 7(1)(c) read with Schedule I of the CGST Act. However, owing to RBI guidelines prohibiting payment of consideration, commission, or brokerage to directors for such guarantees, the open market value of such supply was considered to be Nil, resulting in no GST liability in ordinary circumstances.

With regard to corporate guarantees, the Circular clarified that where a holding company or related entity provides a corporate guarantee to a bank or financial institution on behalf of another related entity, such activity is to be treated as a supply of service between related persons, even if no consideration is charged. The Circular further noted that Rule 28(2), inserted vide Notification No. 52/2023-Central Tax dated 26.10.2023, was intended to provide a specific valuation mechanism in order to ensure uniformity in valuation practices being followed by taxpayers and field formations.

Circular No. 225/19/2024-GST

Subsequent industry representations led to the issuance of Circular No. 225/19/2024-GST, which provided detailed clarification regarding the scope and operation of Rule 28(2). The Circular specifically emphasized that the taxability of corporate guarantees did not originate with the insertion of Rule 28(2). According to the CBIC, the activity of providing a corporate guarantee to a bank or financial institution on behalf of a related person was already taxable under the existing provisions of Section 7 and Schedule I of the CGST Act from the inception of GST. Rule 28(2) was introduced only to prescribe a specific method for determining the value of such taxable supply and to bring certainty and uniformity in its valuation.

Further clarified that corporate guarantees issued or renewed prior to 26.10.2023 were to be valued under Rule 28 as it existed at the relevant time. Corporate guarantees issued or renewed on or after 26.10.2023 would be valued in accordance with Rule 28(2). Valuation is based on the amount guaranteed and not on the actual amount of loan disbursed. GST is payable under the forward charge mechanism in domestic intra-group guarantee transactions. The benefit of the proviso allowing invoice value where the recipient is eligible for full ITC is also available to corporate guarantee transactions.

Meaning of Related Person

Explanation to Section 15, Persons shall be deemed to be related persons if:

• They are officers or directors of one another’s businesses.
• They are legally recognized partners in business.
• They are employer and employee.
• Any person directly or indirectly owns, controls or holds 25% or more of the outstanding voting stock or shares of both of them.
• One of them directly or indirectly controls the other.
• Both of them are directly or indirectly controlled by a third person.
• Together they directly or indirectly control a third person.
• They are members of the same family.

Further: The term “person” includes legal persons. Persons who are associated in business as sole agent, sole distributor or sole concessionaire of the other are also deemed to be related persons.

Export of Services Implications on Corporate Guarantees Issued to Foreign Subsidiaries

A significant issue presently engaging industry is whether a corporate guarantee provided by an Indian holding company to a foreign subsidiary can qualify as an “export of services” under the GST framework. The issue assumes importance because if the transaction qualifies as an export of services, it would constitute a zero-rated supply under Section 16 of the IGST Act. The analysis is set out below.

Section 2(6) of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”) defines “export of services” to mean a supply of any service where all the following conditions are satisfied:

1. the supplier of service is located in India;

2. the recipient of service is located outside India;

3. the place of supply of service is outside India;

4. payment for such service has been received by the supplier in convertible foreign exchange or in Indian Rupees wherever permitted by the Reserve Bank of India; and

5. the supplier and recipient are not merely establishments of a distinct person in terms of Explanation 1 to Section 8 of the IGST Act.

In a typical structure, an Indian parent company provides a corporate guarantee to a foreign bank or financial institution for securing borrowings of its overseas subsidiary.

For illustration:

• ABC (India) provides a corporate guarantee.
• XYZ (China) is the borrower and beneficiary of the guarantee.
• The lender is a foreign bank.

Condition (i): Supplier Located in India

The supplier of service is located in India. Therefore, the first condition is satisfied.

Condition (ii): Recipient Located Outside India

Under the Department’s understanding and the reasoning adopted in the corporate guarantee jurisprudence, the recipient of the guarantee service is the beneficiary subsidiary rather than the lending bank. Since XYZ is located outside India, this condition is also fulfilled.

Condition (iii): Place of Supply Outside India

Section 13(2) of the IGST Act provides that, where no specific rule applies, the place of supply shall be the location of the recipient of services. Since the recipient of service is located outside India, the place of supply would ordinarily be outside India. Therefore, the third condition also appears to be satisfied.

Condition (v): Not Merely Establishments of Distinct Persons

An Indian holding company and its foreign subsidiary are separate legal entities incorporated under different jurisdictions. They are not merely establishments of the same person as contemplated by Explanation 1 to Section 8 of the IGST Act.

Accordingly, this condition also stands satisfied.

The Critical Issue: Receipt of Consideration

The principal controversy arises in relation to Condition (iv), namely receipt of consideration in convertible foreign exchange. In many cases, corporate guarantees are issued without charging any consideration from the foreign subsidiary. Nevertheless, by virtue of Section 7(1)(c) read with Schedule I of the CGST Act, a supply between related persons can be taxable even in the absence of consideration. An argument may therefore arise that once the law itself recognizes a deemed supply without consideration, the absence of actual foreign exchange realization should not defeat export status.

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Author View:

Support for this proposition may be drawn from the first proviso to Rule 37(1) of the CGST Rules, which provides that supplies specified in Schedule I shall be deemed to have been paid for the purposes of Section 16(2) of the CGST Act. Based on this deeming fiction, one possible view is that where a corporate guarantee is supplied to a related person without consideration under Schedule I, payment should be deemed to have been made and the requirement of actual consideration should not frustrate export treatment.

However, it is important to note that the proviso to Rule 37(1) was enacted in the context of input tax credit reversals under Section 16(2) and not specifically for determining compliance with Section 2(6) of the IGST Act. Consequently, the Department may dispute the proposition that deemed payment under Rule 37 automatically satisfies the foreign exchange realization requirement for export of services.

Although a reasonable legal argument exists that a corporate guarantee provided without consideration to an overseas related party constitutes an export of service owing to the deeming fiction applicable to Schedule I transactions, the absence of explicit statutory recognition of deemed foreign exchange realization under Section 2(6) leaves room for departmental challenge. Accordingly, as a matter of abundant caution and to minimise litigation exposure, it is advisable that the Indian guarantor recover at least a nominal guarantee commission from the foreign subsidiary in convertible foreign exchange.

Taxability of Letter of Comfort (LOC) under GST

At the outset, it is important to distinguish a Letter of Comfort (LOC) from a Corporate Guarantee, as both instruments operate in fundamentally different legal spheres.

Letter of Comfort: A Letter of Comfort is generally an expression of assurance or intent issued by a parent company or group entity to a lender regarding the financial standing or future conduct of the borrower. It merely conveys comfort that the borrower shall comply with its financial obligations and does not ordinarily create a legally enforceable obligation on the issuer to discharge the borrower’s liabilities in the event of default. Conversely, a Corporate Guarantee is a legally binding commitment whereby the guarantor undertakes to repay or discharge the borrower’s obligation upon default. Accordingly, a corporate guarantee creates an enforceable contractual obligation, whereas a letter of comfort generally does not.

View taken by courts:

In this regard, reliance may be placed on the decision of the Mumbai Bench of the Income Tax Appellate Tribunal in Tata International Ltd. v. ACIT [(2020) 3 TMI 799 (ITAT Mumbai)], wherein it was observed that there exists a fundamental distinction between a corporate guarantee and a letter of comfort. The Tribunal noted that a letter of comfort merely provides assurance regarding the subsidiary’s compliance with the financing arrangements and does not obligate the issuer to indemnify the lender. A corporate guarantee, on the other hand, imposes a legally enforceable obligation upon the guarantor in favour of the lender.

Similar principles were recognized by the Hon’ble Karnataka High Court in United Breweries (Holding) Ltd. v. Karnataka State Industrial Investment and Development Corporation Ltd. [(2011) 8 TMI 1331 (Karnataka High Court)], wherein the Court held that a letter of comfort is distinct from a guarantee and merely evidences an intention or assurance regarding performance of financial obligations without creating an obligation to make payment in the event of default.

Accordingly, where the document issued by the parent company merely provides comfort, assurance, or support to the lender and does not create a legally enforceable obligation requiring the issuer to discharge the borrower’s liabilities upon default, such instrument may not qualify as a “corporate guarantee” for the purposes of Rule 28(2) of the CGST Rules. Therefore, it can be contended that the arrangement does not amount to a corporate guarantee and consequently falls outside the specific valuation framework prescribed under Rule 28(2) of the CGST Rules.

Conclusion

The GST implications of corporate guarantees continue to be an evolving area of indirect tax law. The Department’s consistent position has been that a corporate guarantee provided between related persons constitutes a supply of service under Section 7(1)(c) read with Schedule I of the CGST Act, even where no consideration is charged. To address valuation disputes, Rule 28(2) was introduced with effect from 26.10.2023 and subsequently clarified through CBIC Circular Nos. 204/16/2023-GST and 225/19/2024-GST. The CBIC has specifically clarified that Rule 28(2) was introduced only to prescribe a valuation mechanism and not to create a new levy, since taxability of corporate guarantees was considered to exist under the GST framework from inception.

The Gujarat High Court in Torrent Power Ltd. v. Union of India has substantially endorsed the Department’s view by holding that a corporate guarantee constitutes a supply of service between related persons, while simultaneously reading down certain aspects of the valuation mechanism and restricting retrospective application of Rule 28(2).

However, as similar issues remain pending before various High Courts, the law is yet to attain finality. Taxpayers should therefore carefully evaluate the nature of guarantee arrangements, valuation implications, and export-related aspects while maintaining adequate documentation to mitigate potential litigation risks