1. The real GST question: what exactly is the guarantee transaction?
A group company may give a guarantee to a bank for another group company's borrowing. Accounts may record it as a contingent liability and no money may move between the two companies.
That accounting treatment does not by itself determine GST.
| Question | Why it matters |
|---|---|
| Who issued the guarantee? | Identify the supplier of the guarantee service. |
| Who is the borrower/recipient? | Determine the recipient and whether the entities are related. |
| Who is the lender? | Rule 28(2) specifically refers to a banking company or financial institution for its covered domestic related-party valuation. |
| What amount is guaranteed? | The special valuation is linked to the amount guaranteed. |
| What is the tenure? | The 1% benchmark is annual and is proportionated for a period below one year. |
| Was actual consideration charged? | Covered valuation uses 1% per annum or actual consideration, whichever is higher. |
| Where is the recipient located? | The amended Rule 28(2) restricts the special rule to a related recipient located in India; export cases are treated separately. |
2. Legal framework
Section 7
Defines supply and includes supplies between related persons in the course or furtherance of business, subject to the Act and Schedules.
Schedule I
Certain activities can be treated as supplies even without consideration, including specified supplies between related persons in the course or furtherance of business.
Rule 28(2)
Provides the special valuation mechanism for the covered corporate guarantee service between related persons.
Rule 28(2) was inserted by Notification No. 52/2023-Central Tax dated 26 October 2023. It was subsequently amended retrospectively with effect from that date through Notification No. 12/2024-Central Tax dated 10 July 2024. CBIC Circular 225/19/2024-GST then addressed multiple practical issues. citeturn0search20turn0search3
3. Rule 28(2): understand the special valuation rule
For a covered supply of corporate guarantee service by a supplier to a related person located in India, by way of providing a corporate guarantee to a banking company or financial institution on behalf of that recipient, the deemed value is 1% of the amount of the guarantee offered per annum or the actual consideration, whichever is higher, subject to the current rule wording and exceptions.
The GST Council material records the recommendation and subsequent amendment to make the annual nature explicit and to address full-ITC and export issues. citeturn0search1turn0search9
Holding company guarantees ₹100 crore of a subsidiary's bank facility for two years. If no higher actual consideration applies and the transaction falls within Rule 28(2), the deemed value is ₹1 crore per year, subject to the applicable law and period.
4. Why can a no-fee corporate guarantee still create GST?
This is one of the most confusing points for finance teams.
A holding company may say: “We did not charge our subsidiary anything for the guarantee. Therefore there is no consideration and no GST.”
Schedule I can bring specified supplies between related persons into the scope of supply even without consideration when the statutory conditions are met. Rule 28 then provides the valuation framework for covered related-party supplies.
CBIC's 2024 circular specifically discusses taxability of corporate guarantees between related persons and explains that Rule 28(2) is about valuation, not the original creation of taxability. citeturn0search20turn0search4
5. How the 1% per annum valuation works
| Guaranteed amount | Period | Deemed value at 1% p.a. |
|---|---|---|
| ₹10 crore | 1 year | ₹10 lakh |
| ₹50 crore | 1 year | ₹50 lakh |
| ₹100 crore | 2 years | ₹2 crore |
| ₹20 crore | 6 months | ₹10 lakh |
| ₹100 crore | 5 years | ₹5 crore |
For a period below one year, CBIC's clarification states that valuation may be calculated proportionately. For example, a six-month guarantee would use 6/12 of 1% of the guaranteed amount, or actual consideration, whichever is higher. citeturn0search7
If the actual consideration is higher than the Rule 28(2) deemed value, the higher amount is relevant for valuation.
6. Multi-year and short-term guarantees
Five-year guarantee
Guarantee amount: ₹100 crore. Tenure: 5 years. Assuming no higher actual consideration and the covered Rule 28(2) conditions apply, the valuation benchmark is ₹1 crore per annum × 5 years = ₹5 crore.
Six-month guarantee
Guarantee amount: ₹100 crore. Six-month period. Proportionate valuation at 1% p.a. is ₹50 lakh, subject to the actual-consideration comparison.
One-year guarantee renewed annually
If the guarantee is issued for one year and separately renewed for subsequent one-year periods, CBIC has clarified that valuation applies on the issue and on each renewal for the relevant year. citeturn0search2
7. Guaranteed amount vs actual loan disbursed
Suppose a subsidiary receives a sanctioned loan facility of ₹100 crore. The holding company gives a corporate guarantee for ₹100 crore. The bank initially disburses only ₹40 crore.
CBIC clarified that the supply is linked to the guarantee service/risk assumed and valuation is based on the amount guaranteed, not the amount of loan actually disbursed. citeturn0search4
The recipient's ITC eligibility, subject to other statutory conditions, is also not made dependent on waiting for the entire loan to be disbursed. citeturn0search4
8. What about guarantees issued before 26 October 2023?
This date is extremely important.
Rule 28(2) itself was inserted from 26 October 2023. However, CBIC clarified that the underlying corporate guarantee service between related persons was taxable even before the insertion of the special valuation rule.
| Guarantee event | Valuation approach |
|---|---|
| Issued/renewed before 26 Oct 2023 | Value under Rule 28 as it existed during the relevant period. |
| Issued/renewed on or after 26 Oct 2023 | Covered valuation under Rule 28(2), as retrospectively amended/clarified. |
CBIC Circular 225/19/2024-GST expressly makes this distinction. citeturn0search20turn0search5
9. Renewal of an old corporate guarantee
An old guarantee can remain in force for years. The accounting team must distinguish simply continuing an old instrument from a fresh renewal/extension.
CBIC's clarification specifically addresses guarantees issued or renewed on or after 26 October 2023. A renewal can therefore change the valuation analysis even if the original guarantee predates that date. citeturn0search20
Recommended register
| Field | Example |
|---|---|
| Guarantee number | CG/2026/014 |
| Guarantor | Holding Company |
| Recipient | Subsidiary |
| Lender | Bank |
| Amount guaranteed | ₹75 crore |
| Original issue date | 01-04-2022 |
| Renewal date | 01-04-2026 |
| Expiry | 31-03-2027 |
| GST position | Rule 28(2) assessment |
10. What if the recipient has full ITC?
This was a major issue because Rule 28(1) contains a proviso dealing with cases where the recipient is eligible for full input tax credit. The corporate-guarantee rule was subsequently amended to address the interaction.
The 53rd GST Council material recommended amending Rule 28(2) so that the second proviso to Rule 28(1) could apply to covered corporate guarantees, and the amendment was made retrospectively from 26 October 2023. citeturn0search1turn0search22
Where the recipient is eligible for full ITC and the conditions of the amended Rule 28 framework are met, the invoice-declared value can be treated as open market value rather than mechanically applying the 1% benchmark. Verify the exact applicable version of Rule 28 for the tax period.
11. Export of corporate guarantee services
Suppose an Indian holding company provides a corporate guarantee for its related overseas subsidiary.
The amended Rule 28(2) was restricted to a related recipient located in India. Accordingly, the special 1% valuation rule does not apply in the same manner to an export of the guarantee service to a related recipient outside India. CBIC Circular 225/19/2024-GST confirms this position. citeturn0search20turn0search2
Test the transaction under the export-of-services conditions in the IGST Act, including recipient location, place of supply and receipt/other applicable conditions. Do not simply apply the domestic 1% rule to every overseas guarantee.
12. Foreign group company gives guarantee for Indian company
Reverse the direction: an overseas related company gives a corporate guarantee for an Indian related company.
CBIC's clarification addresses the situation where the foreign/overseas entity provides the guarantee service to a related entity in India. GST may be payable by the Indian recipient under the reverse charge mechanism, subject to the applicable law and conditions. citeturn0search20
The Indian company should maintain the guarantee document, related-party relationship evidence, foreign entity details, guaranteed amount, tenure, consideration and valuation working.
13. Multiple related companies acting as guarantors
Large groups may have two or more group entities jointly guaranteeing a facility.
| Issue | Practical approach |
|---|---|
| Two guarantors each guarantee separate amounts | Analyse the guarantee service and applicable valuation for each guarantor's guarantee. |
| Multiple guarantors jointly guarantee the same facility | Review the guarantee documents and allocation of guaranteed amounts before calculating GST. |
| One guarantor charges a fee and another does not | Actual consideration and the Rule 28 framework need to be evaluated for each supplier. |
| Guarantee amounts change during the year | Maintain evidence of the effective guaranteed amount and amendment dates. |
14. Loan takeover and change of lender
Corporate guarantees can continue when a loan is refinanced, transferred or taken over by another bank or financial institution.
For GST, review whether the existing guarantee continues, is amended, is discharged, or is freshly issued. The document trail should establish the event date and amount covered.
Do not automatically treat a lender change as a simple accounting modification. Examine the guarantee deed, amendment letter, renewal/extension and new lender documentation.
15. Corporate guarantee vs bank guarantee
| Point | Corporate guarantee | Bank guarantee |
|---|---|---|
| Typical guarantor | Group company / corporate entity | Bank or financial institution |
| Purpose | Supports related entity's borrowing/obligation | Bank undertakes payment subject to guarantee terms |
| Rule 28(2) | Specific related-party corporate guarantee valuation framework can apply | Do not automatically apply the corporate-guarantee rule merely because the words “guarantee” appear. |
| Fee | May be nil or contractual | Bank generally charges commission/fees |
| Accounting | Often contingent liability of guarantor | Banking service arrangement |
16. Personal guarantee by director or promoter
A director/promoter may give a personal guarantee for a company's bank borrowing. This is conceptually different from a corporate guarantee issued by one company for another related company.
Identify the guarantor, whether the person is acting in a business capacity, whether there is consideration, whether the person is a related person for GST purposes, and the specific legal arrangement.
CBIC's corporate-guarantee circular is focused on the supply of corporate guarantee between related persons and should not be stretched into a universal rule for every personal guarantee.
17. Invoice, time of supply and GSTR-1 / GSTR-3B
Invoice
Where a taxable corporate guarantee service exists, the supplier should follow the applicable tax-invoice provisions, identify the recipient, describe the guarantee service, state the relevant taxable value and GST, and maintain the guarantee documentation.
Valuation working
| Particular | Illustrative |
|---|---|
| Guarantee amount | ₹100 crore |
| Tenure | 2 years |
| Rule 28(2) benchmark | 1% × ₹100 crore × 2 = ₹2 crore |
| Actual consideration | ₹1.5 crore |
| Illustrative valuation | Higher applicable amount, subject to Rule 28 conditions |
For return reporting, the supplier should reconcile the corporate-guarantee register with tax invoices and GSTR-1/GSTR-3B. Where reverse charge applies for an imported guarantee service, the Indian recipient should separately account for the reverse-charge liability and eligible ITC.
18. Accounting controls for finance teams
Corporate Guarantee Register
- Guarantee number
- Guarantor GSTIN
- Recipient GSTIN
- Related-party relationship
- Bank/financial institution
- Guaranteed amount
- Issue date
- Renewal date
- Expiry date
GST Working
- Domestic/export status
- Rule 28 version applicable
- 1% p.a. calculation
- Actual consideration
- Full-ITC eligibility
- Taxable value
- GST invoice
- GSTR-1 reconciliation
- GSTR-3B reconciliation
19. Practical business cases
Case 1 — Holding company gives ₹50 crore guarantee to bank for subsidiary
No fee is charged. Both companies are related and the recipient is in India.
No-fee status does not by itself end the GST analysis. Determine the applicable valuation under the current rule, including the full-ITC proviso where applicable.
Case 2 — ₹100 crore guarantee, only ₹30 crore loan drawn
CBIC clarified that valuation is based on the amount guaranteed, not the amount actually disbursed. citeturn0search4
Case 3 — Five-year guarantee
Guarantee amount ₹200 crore for five years. At the 1% p.a. benchmark, the illustrative value is ₹10 crore for the full five-year period, subject to actual consideration and applicable Rule 28 conditions.
Case 4 — Six-month guarantee
Guarantee amount ₹60 crore. Proportionate 1% annual benchmark for six months is ₹30 lakh, subject to the actual-consideration comparison.
Case 5 — Indian parent guarantees foreign subsidiary
Recipient is outside India, so the amended Rule 28(2) restriction to recipients located in India is relevant. Analyse export-of-services conditions separately. citeturn0search2
Case 6 — Foreign parent guarantees Indian subsidiary
The foreign related party's guarantee service to the Indian recipient can trigger reverse-charge GST, subject to the applicable provisions. citeturn0search20
Case 7 — Old guarantee renewed in 2026
Review the renewal under the post-26 October 2023 Rule 28(2) framework rather than treating the original 2022 issue date as the only relevant date.
20. GST audit questions
- List all corporate guarantees issued by the group during the year.
- Which entity is the guarantor?
- Which entity is the recipient?
- Are they related persons?
- Where is the recipient located?
- Who is the lender?
- What amount is guaranteed?
- What is the guarantee tenure?
- Was it issued or renewed after 26 October 2023?
- Was any actual guarantee fee charged?
- How was Rule 28 valuation calculated?
- Does the recipient qualify for full ITC?
- Is the transaction an export or import of service?
- Was GST paid under forward charge or reverse charge as applicable?
- Does the GST invoice agree with the guarantee register?
- Does GSTR-1 agree with the invoice?
- Does GSTR-3B agree with the tax liability?
- Was ITC claimed by the recipient subject to all conditions?
- Are renewals separately tracked?
- Are amendments to guaranteed amounts documented?
21. Common mistakes
| Mistake | Why it is risky |
|---|---|
| “No guarantee fee, so no GST.” | Related-party supply provisions can apply without monetary consideration. |
| Applying 1% to every guarantee | Rule 28(2) has specific wording and conditions; it is not a universal guarantee rule. |
| Calculating 1% on loan actually drawn | CBIC clarified that the amount guaranteed is the relevant basis, not actual disbursement. citeturn0search4 |
| Ignoring renewal dates | Issue/renewal date affects the applicable valuation framework. |
| Applying domestic Rule 28(2) to exports | The amended rule is restricted to related recipients located in India. |
| Ignoring reverse charge on foreign guarantee | Direction of supply must be identified. |
| Assuming full ITC is irrelevant | The amended Rule 28 framework specifically addresses the full-ITC situation. |
| Mixing corporate and personal guarantees | Different legal arrangements can have different GST analysis. |
22. Practical decision framework
Related-party corporate guarantee service for the covered banking/financial-institution arrangement, with recipient located in India and issue/renewal within the applicable period.
Foreign recipient, foreign guarantor, personal guarantee, bank guarantee, old guarantee, multiple guarantors, lender change or unusual contractual structure.
The presence of the word “guarantee” alone is not enough. First establish whether the transaction falls within the specific Rule 28(2) wording.
23. Frequently Asked Questions
For covered related-party corporate guarantee transactions, absence of a separate fee does not by itself remove the GST analysis. Schedule I and Rule 28 need to be considered.
No. It is a valuation mechanism under Rule 28(2). GST is calculated separately at the applicable rate.
The current Rule 28(2) framework uses 1% per annum of the guaranteed amount, or actual consideration if higher, subject to the rule's conditions. citeturn0search20turn0search7
CBIC clarified that the value is based on the amount guaranteed rather than the amount actually disbursed. citeturn0search4
Pre-26 October 2023 guarantees are valued under the Rule 28 provisions applicable at that time. Guarantees issued or renewed on/after that date are subject to the amended framework. citeturn0search20
The amended rule is restricted to a related recipient located in India, so export treatment needs to be analysed separately. citeturn0search2
CBIC has clarified the reverse-charge treatment for the foreign/overseas entity providing the guarantee service to the Indian related recipient, subject to the applicable provisions. citeturn0search20
No. The amended Rule 28 framework addresses the full-ITC situation and valuation. ITC eligibility and valuation are separate questions.
No. Do not mechanically apply the corporate-guarantee rule to a personal guarantee without analysing the actual legal arrangement.
A central guarantee register containing issue/renewal dates, amount, lender, guarantor, recipient, related-party status, location, valuation, invoice and return reconciliation.
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Explore Compliance →24. KEY TAKEAWAY
Corporate guarantee GST is not simply a question of whether a fee was charged.
For covered related-party guarantees, the critical chain is: