Start with the guarantee, the recipient and the date
A corporate guarantee can be a supply to the entity whose borrowing it supports, even when the deed is given to a lender. Test the relationship under the explanation to section 15 and whether the service is provided in the course or furtherance of business. Section 7 and Schedule I can bring related-person supplies into GST without consideration. For imports from a related person or another establishment abroad, consider Schedule I paragraph 4 specifically. A shareholding connection is a starting point; identify the service and the actual contracting and beneficiary entities.
Rule 28 before and after 26 October 2023
| Situation | What to apply | Evidence |
|---|---|---|
| Issue or renewal before 26 October 2023 | CBIC Circular 225 refers to Rule 28 as then applicable. Do not back-apply the new percentage to a historical period. Review the court ruling below for continuing guarantees. | Original deed, amendments, period under review and evidence of valuation. |
| Related recipient in India; covered guarantee | Under the notified text of Rule 28(2), as amended with effect from 26 October 2023, compare 1% per annum of the amount guaranteed with actual consideration. Read the higher-of wording with the judicial development below. | Guaranteed amount, actual consideration, issue date and contractual term. |
| Recipient eligible for full input tax credit | The amended Rule 28(2) proviso deems the invoice value to be the supply value. Do not assume eligibility, a nil invoice value or an exemption from invoicing. | Invoice and evidence that the recipient is eligible for full credit. |
| Recipient outside India | The specific Rule 28(2) wording is limited to a related recipient located in India. Apply the relevant valuation and place-of-supply rules and check export eligibility independently. | Recipient location, payment evidence and establishments of the parties. |
Notification 52/2023 inserted Rule 28(2). Notification 12/2024 amended it with effect from 26 October 2023, adding the per-annum basis, the Indian-recipient limitation and the full-credit proviso. Circular 225 applies the calculation to the guaranteed amount, rather than the loan drawn, and treats an issued fixed multi-year guarantee as covering the full fixed term at issue. Where the deed is issued for one year at a time, apply the relevant valuation on issue and each renewal. For a genuinely shorter guarantee term, prorate the percentage. A financial year-end or lender takeover without fresh issue or renewal does not by itself establish a new guarantee.
What the courts have decided
In Torrent Power Ltd v. Union of India (14 August 2026), the Gujarat High Court upheld Rule 28(2) subject to reading down the higher-of expression. Its reasoning distinguishes a case with evidenced actual consideration from applying the deeming benchmark when no actual value is ascertainable. The court rejected application of Rule 28(2) to the period before 26 October 2023, but held that continuing guarantees can attract the levy from that date. It set aside the challenged section 74 action against the petitioners and the circulars to the extent inconsistent with its decision. This is a High Court ruling. Check its applicability to the jurisdiction and transaction, and any later appeal, stay or instructions before adopting a filing position.
Edelweiss Financial Services concerned service tax under the Finance Act, 1994. The Supreme Court dismissed the Revenue appeal on the absence of consideration on those facts. It does not create a general exemption from GST for related-party guarantees. Circular 199 addresses specified distinct-person services and does not by itself deem an unbilled guarantee between separate group companies to have nil value.
Personal guarantees and cross-border transactions
Circular 204 states that where the RBI banking guidelines apply and no remuneration or consideration is paid to the director for a personal guarantee, the open-market value is nil on those facts. This is a valuation clarification, not a general personal-guarantee exemption. Where remuneration is permitted and paid, determine the actual consideration and check the applicable director-services reverse-charge entry.
| Transaction | GST question | What to check |
|---|---|---|
| Indian guarantor and Indian related recipient | Domestic forward charge in the circumstances described in Circular 225. | Supplier location, place of supply, applicable rate and recipient’s actual credit eligibility. |
| Foreign guarantor and Indian related recipient | Reverse charge if supplier is outside India, recipient and place of supply are in India, and the import is a taxable supply. | IGST Act and Notification 10/2017; self-invoice where required, cash payment and eligible ITC separately. The lender’s foreign address does not determine the recipient. |
| Indian guarantor and foreign related recipient | Test export of services under section 2(6) of the IGST Act before applying section 16 zero-rating. | Supplier and recipient locations, place of supply, receipt in convertible foreign exchange or permitted INR, and separate establishment condition. Do not assume either export or 18% liability from the foreign address alone. |
Credit depends on sections 16 and 17 and the applicable documentation, return and timing requirements. Business use and an invoice are not the only conditions. Cash paid under reverse charge and later use of eligible credit are separate events. An otherwise eligible transaction can still tie up cash.
Seven worked examples
The facts are hypothetical. The percentage calculations assume a covered financial service taxed at 18%, with no full-credit invoice-value treatment and no contrary court direction applicable to the illustration, unless otherwise stated.
1. A one-year ₹100 crore domestic guarantee
Assume the holding company and recipient are in different States, the guarantee covers ₹100 crore for one year from 1 April 2024 and consideration is nil. The notified percentage gives ₹1 crore value and ₹18 lakh IGST. Check the actual invoice and reporting period. If the recipient is instead eligible for full ITC, test the retrospectively inserted invoice-value proviso and document the invoice and credit conditions separately.
2. A director’s personal guarantee
A director who holds 65% of the company personally guarantees a ₹25 crore loan. A proposed 1% valuation would be ₹25 lakh, with ₹4.50 lakh tax at 18%. The corporate-guarantee percentage does not apply to this personal guarantee. Assume the banking guidelines apply and the director receives no consideration; Circular 204 gives a nil open-market value on those facts.
3. An import from a foreign parent
Assume a one-year guarantee over USD 20 million from 1 May 2024. At an illustrative ₹83 per USD, the guaranteed amount is ₹166 crore; use the legally applicable conversion rate in practice. If the Indian subsidiary receives a taxable import, the 1% calculation gives ₹1.66 crore and IGST of ₹29.88 lakh. Reconcile reverse-charge payment and any self-invoice with the return, then test ITC independently.
4. Five-year guarantee versus a genuine six-month guarantee
On a ₹50 crore guarantee issued on 1 October 2024 for a fixed five years, the notified calculation gives ₹2.50 crore value and ₹45 lakh tax, before any applicable different valuation. Circular 225 treats the fixed term at issue; do not split it into financial years. If a different deed actually covers only six months, the value is ₹25 lakh and tax ₹4.50 lakh. A separate one-year issuance would give ₹50 lakh and ₹9 lakh tax.
5. Co-guarantors and actual shares
Two related guarantors cover a ₹30 crore facility for one year. Assume their legally supported guarantee shares are 60% and 40% and consideration is nil. Their proportionate values are ₹18 lakh and ₹12 lakh, with tax of ₹3.24 lakh and ₹2.16 lakh, respectively. Combined value is ₹30 lakh and tax ₹5.40 lakh. Use the deeds, rather than equity percentages alone; the notified calculation is not a cap on actual consideration.
6. Testing a notice for earlier years
Assume a section 73 notice for FY 2018–19 to FY 2021–22 proposes ₹1.80 crore GST, equivalent to an implied taxable value of ₹10 crore at 18% before interest or penalty. Obtain the department’s workings. Distinguish the statutory supply issue from valuation under the earlier Rule 28 and reject a mechanical back-application of Rule 28(2). Check limitation, applicable case law and any guarantee that continued after 26 October 2023. Neither the service-tax judgment nor the fact that a notice was issued establishes its result.
7. Guarantee records for a group with 12 subsidiaries
Record each deed, legal guarantor, guaranteed maximum, currency, issue and renewal dates, and the valuation basis. Reconcile invoices and ITC to the correct GST registrations. Separately assess applicable Companies Act Schedule III presentation, the relevant accounting standard, recognition or disclosure of guarantees, and any consolidation adjustments. An accounting elimination does not itself undo a GST transaction.
Frequently asked questions
1. Can a free corporate guarantee be a supply?
Yes, if the Schedule I and business conditions are met. Determine the valuation and applicable court position separately.
2. Does full ITC matter?
Yes. The amended Rule 28(2) contains an invoice-value proviso when the recipient is eligible for full ITC. Document the actual eligibility.
3. Does a director’s guarantee have the same formula?
No. Review Circular 204 and the facts concerning consideration and banking conditions.
4. Is the percentage retrospective to the start of GST?
No. Rule 28(2) dates from 26 October 2023. Check the prior valuation rules and the relevant court treatment of continuing guarantees.
5. How is a foreign parent’s guarantee handled?
Test whether there is a taxable import of services, then check reverse charge, valuation, documentation and credit separately.
6. What should a reconciliation track?
Link each deed and renewal to its recipient, valuation, time of supply, invoice and return. Verify the applicable court and administrative position before filing.
Sources
- Notification 52/2023–Central Tax, insertion of Rule 28(2)
- Notification 12/2024–Central Tax, amendment to Rule 28(2)
- CBIC Circular 225/19/2024-GST, corporate guarantee valuation and timing
- CBIC Circular 204/16/2023-GST, including personal guarantees
- CBIC Circular 199/11/2023-GST, distinct-person services in the circumstances covered
- CGST Act, sections 7, 15–17, 31, 49 and Schedule I, read with subsequent amendments
- IGST Act, sections 2, 5, 7, 12, 13 and 16, read with amendments
- Notification 10/2017–Integrated Tax (Rate), notified reverse charge
- Notification 11/2017–Central Tax (Rate), financial services, read with amendments
- Gujarat High Court: Torrent Power Ltd v. Union of India, SCA 12175/2024 and connected matters, 14 August 2026
- Supreme Court: Commissioner of CGST and Central Excise v. Edelweiss Financial Services Ltd, 17 March 2023 (service tax)