GST Implications on Personal and Corporate Guarantees

Guarantees—personal, corporate, and bank—play a crucial role in financial transactions, but under GST they attract different tax treatments. A guarantee involves a surety assuring a creditor of fulfilling obligations if the principal debtor defaults. Personal guarantees, usually provided by directors or individuals, fall under Schedule I as related-party supplies without consideration; however, due to RBI’s prohibition on charging fees, their open market value is deemed nil, resulting in no GST unless consideration is received. Corporate guarantees are treated as taxable supplies with valuation fixed at 1% of the guaranteed amount per annum or actual consideration, unless the recipient is eligible for full ITC, in which case invoice value applies. Bank guarantees constitute commercial supplies and attract GST on the actual fee charged. All guarantees fall under SAC 997113 and are taxed at 18%. Businesses must assess GST implications carefully, as guarantees now carry significant tax and compliance consequences.

I. Introduction

In the financial world, guarantee is a common term used in routine transactions and business cycles. We know guarantee is a promise made by a person to take responsibility if another person fails to do something. However, guarantee is a much broader concept.

 II. Definition

A guarantee is a form of transaction in which one person, to obtain trust, confidence or credit for another, agrees to be financially answerable for them. It may also designate an agreement through which claims, rights or possessions are secured. In a contract of guarantee, there are three main parties: the creditor, the principal debtor, and the surety.

i. The Creditor: Person or entity to whom the debt or obligation is owed. For example, in a loan agreement, the bank or financial institution would be the creditor.

ii. The Principal Debtor: Person or entity who is primarily liable for the debt or obligation. In the loan example, the borrower would be the principal debtor.

ii. The Surety: Person or entity who guarantees the debt or obligation of the principal debtor. If the principal debtor fails to fulfil their obligation, the surety is responsible for making good on the debt.

III. Types of Guarantees

Majorly, there are three types of Guarantees:

i. Personal Guarantee

ii. Corporate Guarantee

iii. Bank Guarantee

i. Personal Guarantee: The term ‘personal guarantee’ describes an individual’s legal commitment to repay credit extended to a business or another person for which they serve as an executive or partner, or in any other capacity. Offering a personal guarantee indicates that if the business is unable to settle its debt, the individual will be personally responsible for repaying the same to the creditor.

 For Example:

ABC Pvt. Ltd. is a small business applying for a ₹20 lakh loan from a bank. The bank is concerned about the company’s repayment ability. So, the Managing Director, Mr Raj Sharma, agrees to provide a personal guarantee.

ii. Corporate Guarantee: A corporate guarantee is a contractual agreement where one company (the surety) promises to fulfil the financial obligations of another company (the debtor) if the debtor defaults on a loan or other debt. In simpler terms, it’s a promise made by a company to pay for another company’s debt if such a company is unable to.

For Example:

XYZ Ltd. is a newly formed joint venture (JV). It wants to take a loan of ₹5 crore from a bank. Since XYZ Ltd. is new and has no creditworthiness, its parent company, ABC Pvt. Ltd., gives a Corporate Guarantee to the bank.

iii. Bank Guarantee: A bank guarantee is a financial assurance provided by a bank on behalf of its customer. It serves as a guarantee that the bank will fulfil the financial or contractual obligations if the customer fails to do so.

For Example:

ABC Constructions Pvt. Ltd. is awarded a ₹10 crore government contract. The contract requires a Performance Bank Guarantee (PBG) of 10%, i.e., ₹1 crore, to ensure ABC completes the work as agreed.

ABC approaches its bank (ICICI Bank) for the guarantee. The bank issues a Performance Bank Guarantee in favour of the government department. If ABC fails to perform, the department can invoke the guarantee, and the bank must pay ₹1 crore to them.

Furthermore, there are various types of Bank Guarantee, which are as follows:

a. Financial Guarantee: It ensures the payment of money.

b. Performance Guarantee: It ensures the performance of contractual obligations.

c. Advance Payment Guarantee: It ensures repayment of advance if the seller, contractor, or supplier fails to deliver goods or services.

e. Bid Bond Guarantee: It is a type of Bank Guarantee provided during a tender or bidding process. It ensures that the bidder will:

• Not withdraw from the bid after submission
• Sign the contract and provide further guarantees, if required.

e. Deferred Payment Guarantee: It ensures the seller (creditor) that the buyer (debtor) will make payments in instalments over time, and if the buyer fails, the bank will pay on their behalf.

f. Foreign Bank Guarantee: It is a guarantee issued by a foreign bank on behalf of its customer, assuring a third party (usually in another country) that if the customer fails to meet contractual or payment obligations, the bank will compensate the third party.

g. Shipping Guarantee: It is a guarantee issued by a bank to a shipping company, allowing the importer (buyer) to take delivery of goods without presenting the original Bill of Lading.

h. Customs or Excise Guarantee: It is a guarantee given to Customs or Excise authorities to ensure that the importer or manufacturer will fulfil their legal obligations, such as payment of customs duty, excise duty, or compliance with regulations.

i. Retention Money Guarantee: It is a guarantee given by a contractor or supplier to the client (employer), assuring that the retention money (normally withheld as security for performance) can be released early, without compromising the client’s protection.

j. Court Guarantee / Judicial Bond: It is a guarantee or bond issued by a bank or financial institution on behalf of a party involved in legal proceedings, ensuring that the party will comply with the court’s orders, such as paying a sum of money or performing a required action.

IV. Difference between Personal Guarantee and Corporate Guarantee 

 V. Valuation and GST Implications on Guarantees

The Valuation and GST Implications on Guarantees are as follows:

i. Personal Guarantee

Personal Guarantees are often given by one person to another related person. Section 7 of the CGST Act, 2017 mandates that any activity which is specified in Schedule I of the Act will be treated as a Supply even if the same is made without any consideration.

Further, Entry 2 of Schedule I reads as under:

“(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.”

Hence, on taking into account the above-mentioned legal references, Personal Guarantee can be considered as a supply under Section 7(1)(c) of the CGST Act, 2017.

ii. Valuation and GST Implication

Personal Guarantees, per se, are given without consideration, hence they are required to be valued under Rule 28(1) of the CGST Rules 2017, which provides that the value of the supply of goods or services between distinct persons or related persons, other than through an agent, shall be —

• Open Market Value (OMV) of such supply; or
• Value of like kind and quality, if OMV is not available; or
• Cost plus method or reasonable means, if the above two are not possible.

As the guarantee is personal in nature, there is no element of business or profit-making involved. Further, the RBI has therefore vide Para 2.2.9 of its Circular No. RBI/2021-22/121 dated 9^th November, 2021 mandated as under:

The system of obtaining guarantees should not be used by the directors and other managerial personnel as a source of income from the company. Banks should obtain an undertaking from the borrowing company as well as the guarantors that no consideration whether by way of commission, brokerage fees or any other form, would be paid by the former or received by the latter, directly or indirectly. This requirement should be incorporated in the bank’s terms and conditions for sanctioning of credit limits.

In view of this express mandate by the RBI, the Government vide Circular No. 204/16/2023-GST dated 27th October, 2023, has said that open market value for personal guarantee would be NIL and therefore said transaction, even though taxable, cannot be taxed for want of a value. In cases where there is a consideration involved, then the same would be taxed under GST.

 ii. Corporate Guarantee

Taking into account the legal provisions of section 7 of the CGST Act, 2017, read with Schedule I, a Corporate Guarantee is to be treated as a Supply under Section 7(1)(c) of the CGST Act, 2017.

Valuation and GST Implication

Again, Corporate Guarantees are transacted between related persons and hence in case there is no transaction value available, it will be valued under Rule 28(2) (inserted via Notification No. 52/2021 dated 26/10/2023) of the CGST Rules 2017 which provides that 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 the higher of:

a) 1% per annum of the amount guaranteed, OR

b) actual consideration paid/ payable to the guarantor.

The said valuation mechanism of the Corporate Guarantee is also clarified by the Department through Circular No. 204/16/2023-GST dated 27th October, 2023.

Further, there is a proviso to the said sub-rule (inserted via Notification No. 12/2024 dated 10/07/2024 with retrospective effect from 26.10.2023) which provides that in cases where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the value of said supply of services. Hence, if the transaction is between related parties where the Guarantee receiver is eligible for Full ITC, valuation would be restricted to the value mentioned in the invoice, and 1% per annum valuation would not be mandatory.

Additionally, the Department has also clarified that the activity of providing guarantee by the Director to the banks/ financial institutions for securing credit facilities for their companies shall not be valued under Rule 28(2) of the CGST Rules 2017 and shall be valued as per Rule 28(1) of the CGST Rules 2017 (i.e. Personal Guarantee).

iii. Bank Guarantee

As per Section 7(1)(a) of the CGST Act, 2017, supply means “all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.”

Hence, on taking into account the above-mentioned legal reference, a Bank Guarantee can be considered as a supply under Section 7(1)(a) of the CGST Act, 2017.

Valuation and GST Implication

Bank Guarantee are valued as per Section 15(1) of the CGST Act 2017 which provides that the “value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.”

Hence, the value of Bank Guarantee is the transaction value — i.e. the fee/commission actually charged or payable to the bank, and GST is leviable on the same.

VI. SAC and Rates at which GST is charged on Guarantees

Guarantees are covered under Service Classification Code (SAC) 997113 (Credit-granting services including stand-by commitment, guarantees and securities).

The applicable GST Rate for services falling under SAC 997113 is 18% (typically split as 9% CGST + 9% SGST for intra-state supplies, or 18% IGST for inter-state).

VII. Conclusion

Guarantees may seem like routine paperwork in business transactions, but under GST, they carry real tax consequences that can’t be ignored. The government’s approach is straightforward: if there’s commercial value in a guarantee, it’s taxable.

The distinction between personal, corporate, and bank guarantees under GST is not merely technical but philosophically important. Personal guarantees, escape GST (valued at nil), only because the RBI explicitly prohibits directors from profiting on them, which inversely could mean that hypothetically the moment a director charges even a rupee for giving a guarantee, GST at 18% applies. Corporate guarantees, valued at 1% per annum or actual consideration, acknowledge the commercial substance of inter-company risk transfers while providing valuation flexibility for related-party transactions with full ITC eligibility. Bank guarantees, taxed on transaction value, reflect their purely commercial nature.

In today’s interconnected business environment, these provisions have far-reaching consequences, which means companies can no longer issue guarantees casually or “on paper” without understanding the tax costs attached. Companies structuring group transactions must now consider the GST costs when deciding between personal and corporate guarantees. The 1% valuation norm for corporate guarantees, though seemingly modest, can significantly impact tax cash flows in high-value transactions, particularly for businesses with substantial guarantee exposures. The retrospective relief for recipients eligible for full ITC provides welcome flexibility, yet demands careful documentation and invoice discipline.

For startups and SMEs relying on promoter guarantees, the nil valuation provides relief, but only if no consideration is charged. Banks and financial institutions, meanwhile, must ensure their guarantee fee structures transparently reflect GST to avoid disputes.

To conclude, the taxing scope of guarantees is much broader today, given the different scenarios worldwide. A Guarantee under GST is not a mere trust-building or supporting credit-worthiness tool, but a taxable financial instrument having tangible implications. Guarantees are no longer just about credit risk; they’re about tax risk too. In a world where credit is currency and trust is traded, understanding the GST implications of guarantees is no longer optional; it’s essential for survival and growth. Corporate Guarantees are a classic example Schedule I of the CGST Act coming into play where something which carries no consideration is still being taxed.

However, in our view, 2 aspects need more research and may be judicial scrutiny:

a. Constitutionality of taxing a transaction without a possibility of consideration.

b. What if the corporate charges say 0.1% for giving a guarantee to its subsidiary (which is not eligible for ITC), can the department still argue that valuation by deeming fiction of 1% would still be applicable? Supreme Court in case of Wipro has already spoken in favour of the assessee in case a transaction value is available then tax cannot be levied on a deemed valuation. Further, wont the entire transaction go out of the ambit of schedule I as there is a consideration available now and consequently rule 28 would not be required to be applied.

Food for thought !!!

Authors:

CA Nitesh Jain

Vishal Vyas