GST • RELATED PARTIES • CORPORATE GUARANTEE • RULE 28(2)

GST on Corporate Guarantees, Bank Guarantees & Group Company Guarantees

Corporate guarantees between holding companies, subsidiaries and other related entities became a major GST valuation issue after Rule 28(2). This practical guide explains when GST applies, how the 1% per annum valuation works, what changed from 26 October 2023, how ITC and exports are treated, and how finance teams should account for guarantees.

Rule 28(2)Special valuation rule
1% p.a.Guaranteed amount benchmark
26 Oct 2023Key valuation date
Circular 225/19/2024Major clarification

Quick Answer: Does GST apply to a corporate guarantee?

For a corporate guarantee supplied by one related person to another related person for a banking company or financial institution, GST treatment is governed by the special valuation framework in Rule 28(2), subject to its conditions and amendments. The important point is that taxability and valuation are separate questions.

No fee charged?

Absence of a guarantee fee does not automatically mean there is no supply where the related-party GST provisions apply.

1% is valuation

For covered domestic related-party corporate guarantees, the rule provides a deemed value of 1% of the guaranteed amount per annum or actual consideration, whichever is higher.

Loan not fully drawn?

CBIC clarified that valuation is based on the amount guaranteed, not the amount of loan actually disbursed.

Critical distinction: A corporate guarantee, a bank guarantee issued by a bank, and a personal guarantee by an individual director are not automatically the same GST transaction. Identify the actual guarantor and legal arrangement first.

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.

QuestionWhy 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.

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. citeturn0search1turn0search9

🟢 Basic covered example

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.

Do not read “1%” as a tax rate. It is a valuation mechanism. GST is then calculated at the applicable rate on that taxable value.

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.”

🔴 That conclusion is not sufficient for a related-party transaction

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. citeturn0search20turn0search4

5. How the 1% per annum valuation works

Guaranteed amountPeriodDeemed value at 1% p.a.
₹10 crore1 year₹10 lakh
₹50 crore1 year₹50 lakh
₹100 crore2 years₹2 crore
₹20 crore6 months₹10 lakh
₹100 crore5 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. citeturn0search7

🟠 Always check actual consideration

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. citeturn0search2

Finance control: Do not calculate 1% once and close the file forever. Track guarantee issue date, expiry, renewal date, guaranteed amount and changes in sanctioned limits.

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.

🔴 Do not reduce the GST valuation to ₹40 crore merely because that is the amount drawn

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. citeturn0search4

The recipient's ITC eligibility, subject to other statutory conditions, is also not made dependent on waiting for the entire loan to be disbursed. citeturn0search4

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 eventValuation approach
Issued/renewed before 26 Oct 2023Value under Rule 28 as it existed during the relevant period.
Issued/renewed on or after 26 Oct 2023Covered valuation under Rule 28(2), as retrospectively amended/clarified.

CBIC Circular 225/19/2024-GST expressly makes this distinction. citeturn0search20turn0search5

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.

🟠 Review the renewal date

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. citeturn0search20

Recommended register

FieldExample
Guarantee numberCG/2026/014
GuarantorHolding Company
RecipientSubsidiary
LenderBank
Amount guaranteed₹75 crore
Original issue date01-04-2022
Renewal date01-04-2026
Expiry31-03-2027
GST positionRule 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. citeturn0search1turn0search22

🟠 Current practical approach

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.

Do not confuse “eligible for ITC” with “actually claimed ITC”. The rule refers to eligibility and other statutory conditions, not merely whether the accounting team eventually booked the credit.

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. citeturn0search20turn0search2

🟢 Export analysis is separate

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.

🟠 Reverse-charge analysis

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. citeturn0search20

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.

IssuePractical approach
Two guarantors each guarantee separate amountsAnalyse the guarantee service and applicable valuation for each guarantor's guarantee.
Multiple guarantors jointly guarantee the same facilityReview the guarantee documents and allocation of guaranteed amounts before calculating GST.
One guarantor charges a fee and another does notActual consideration and the Rule 28 framework need to be evaluated for each supplier.
Guarantee amounts change during the yearMaintain evidence of the effective guaranteed amount and amendment dates.
Do not simply divide the bank facility equally among group companies. Use the actual legal guarantee documents and obligations.

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.

🟠 Fresh event vs continuation matters

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

PointCorporate guaranteeBank guarantee
Typical guarantorGroup company / corporate entityBank or financial institution
PurposeSupports related entity's borrowing/obligationBank undertakes payment subject to guarantee terms
Rule 28(2)Specific related-party corporate guarantee valuation framework can applyDo not automatically apply the corporate-guarantee rule merely because the words “guarantee” appear.
FeeMay be nil or contractualBank generally charges commission/fees
AccountingOften contingent liability of guarantorBanking service arrangement
Important: Rule 28(2) is not a blanket GST rule for every type of guarantee. Its wording specifically addresses the covered corporate guarantee service between related persons for the specified banking/financial-institution context.

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.

🟠 Do not mechanically apply Rule 28(2)

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

ParticularIllustrative
Guarantee amount₹100 crore
Tenure2 years
Rule 28(2) benchmark1% × ₹100 crore × 2 = ₹2 crore
Actual consideration₹1.5 crore
Illustrative valuationHigher 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.

Do not wait for loan drawdown. CBIC's clarification states that the guarantee service is not linked to the amount actually disbursed by the lender. citeturn0search4

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
Best control: Maintain a guarantee register independent of the contingent-liability note. The GST team should receive every new guarantee and renewal from treasury/finance before the bank document is closed.

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.

🟠 Covered transaction to evaluate under Rule 28(2)

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

🔴 Do not value only at ₹30 crore

CBIC clarified that valuation is based on the amount guaranteed, not the amount actually disbursed. citeturn0search4

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

🟢 Do not mechanically apply domestic 1% Rule 28(2)

Recipient is outside India, so the amended Rule 28(2) restriction to recipients located in India is relevant. Analyse export-of-services conditions separately. citeturn0search2

Case 6 — Foreign parent guarantees Indian subsidiary

🟠 Examine import/RCM treatment

The foreign related party's guarantee service to the Indian recipient can trigger reverse-charge GST, subject to the applicable provisions. citeturn0search20

Case 7 — Old guarantee renewed in 2026

🟠 Renewal date matters

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

  1. List all corporate guarantees issued by the group during the year.
  2. Which entity is the guarantor?
  3. Which entity is the recipient?
  4. Are they related persons?
  5. Where is the recipient located?
  6. Who is the lender?
  7. What amount is guaranteed?
  8. What is the guarantee tenure?
  9. Was it issued or renewed after 26 October 2023?
  10. Was any actual guarantee fee charged?
  11. How was Rule 28 valuation calculated?
  12. Does the recipient qualify for full ITC?
  13. Is the transaction an export or import of service?
  14. Was GST paid under forward charge or reverse charge as applicable?
  15. Does the GST invoice agree with the guarantee register?
  16. Does GSTR-1 agree with the invoice?
  17. Does GSTR-3B agree with the tax liability?
  18. Was ITC claimed by the recipient subject to all conditions?
  19. Are renewals separately tracked?
  20. Are amendments to guaranteed amounts documented?

21. Common mistakes

MistakeWhy it is risky
“No guarantee fee, so no GST.”Related-party supply provisions can apply without monetary consideration.
Applying 1% to every guaranteeRule 28(2) has specific wording and conditions; it is not a universal guarantee rule.
Calculating 1% on loan actually drawnCBIC clarified that the amount guaranteed is the relevant basis, not actual disbursement. citeturn0search4
Ignoring renewal datesIssue/renewal date affects the applicable valuation framework.
Applying domestic Rule 28(2) to exportsThe amended rule is restricted to related recipients located in India.
Ignoring reverse charge on foreign guaranteeDirection of supply must be identified.
Assuming full ITC is irrelevantThe amended Rule 28 framework specifically addresses the full-ITC situation.
Mixing corporate and personal guaranteesDifferent legal arrangements can have different GST analysis.

22. Practical decision framework

1. Identify guarantor2. Identify recipient3. Check related-party status4. Check lender5. Check recipient location6. Check issue/renewal date7. Determine value8. Determine charge mechanism9. Reconcile returns
🟢 RULE 28(2) ANALYSIS REQUIRED

Related-party corporate guarantee service for the covered banking/financial-institution arrangement, with recipient located in India and issue/renewal within the applicable period.

🟠 SEPARATE ANALYSIS REQUIRED

Foreign recipient, foreign guarantor, personal guarantee, bank guarantee, old guarantee, multiple guarantors, lender change or unusual contractual structure.

🔴 DO NOT APPLY 1% BLINDLY

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

1. Is GST payable if the parent company gives a guarantee free of cost?

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.

2. Is 1% a GST rate?

No. It is a valuation mechanism under Rule 28(2). GST is calculated separately at the applicable rate.

3. Is the 1% calculated every year?

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. citeturn0search20turn0search7

4. What if the loan is only partly disbursed?

CBIC clarified that the value is based on the amount guaranteed rather than the amount actually disbursed. citeturn0search4

5. What if the guarantee was issued before 26 October 2023?

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. citeturn0search20

6. Does Rule 28(2) apply to an overseas related recipient?

The amended rule is restricted to a related recipient located in India, so export treatment needs to be analysed separately. citeturn0search2

7. Does a foreign parent giving a guarantee to an Indian subsidiary create reverse charge?

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. citeturn0search20

8. Does full ITC at the recipient make the transaction irrelevant?

No. The amended Rule 28 framework addresses the full-ITC situation and valuation. ITC eligibility and valuation are separate questions.

9. Is a personal guarantee by a director automatically valued at 1%?

No. Do not mechanically apply the corporate-guarantee rule to a personal guarantee without analysing the actual legal arrangement.

10. What should treasury and GST teams maintain?

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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Next practical step: Obtain the company's complete bank-guarantee/corporate-guarantee register from treasury. Reconcile every guarantee to the bank sanction, guarantee deed, related-party master, issue/renewal date, GST invoice and GSTR-1/GSTR-3B working.

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:

Related persons?Corporate guarantee?Covered lender?Recipient in India?Issue/renewal date?Guaranteed amount?1% p.a. / actual consideration?Full ITC?Export/RCM?
For finance teams: Maintain a live corporate-guarantee register. The highest-risk mistakes are failing to identify renewals, using the loan drawn instead of the guaranteed amount, ignoring the full-ITC rule, and applying the domestic 1% mechanism to export or unrelated guarantee arrangements.