GST on Corporate & Personal Guarantees: Rule 28(2) Valuation, 1% Safe Harbour, Circular No. 204/2023 & Transfer Pricing Guide

Executive Overview & Quick Highlights: In corporate treasury management, syndicated bank credit syndication, and multi-tier group financing, the provision of credit support instruments—specifically corporate guarantees furnished by parent entities for credit facilities availed by subsidiaries, and personal guarantees extended by promoter-directors to secure commercial borrowings—represents an indispensable financing tool. However, in India's Goods and Services Tax (GST) landscape, the taxation and valuation of guarantees between "related persons" has triggered unprecedented controversy, high-stakes departmental show cause notices, and active constitutional challenges before multiple High Courts. Governed by Section 7(1)(c) read with Paragraph 2 of Schedule I of the Central Goods and Services Tax (CGST) Act, 2017, supplies of goods or services between related persons are deemed to be taxable supplies even when made without monetary consideration.

Historically, the valuation of intra-group guarantees was fraught with uncertainty: did extending a corporate guarantee constitute a financial service? How should the "open market value" be determined under Rule 28 when banks rarely charge transparent fees for third-party credit enhancement? To resolve this judicial quagmire, the Central Board of Indirect Taxes and Customs (CBIC) notified a sweeping regulatory framework via Notification No. 52/2023-Central Tax (dated October 26, 2023), inserting sub-rule (2) in Rule 28 of the CGST Rules. Under Rule 28(2), the value of supply of services by a supplier to a recipient who is a related person, by way of providing a corporate guarantee to any banking company or financial institution on behalf of the said recipient, is statutorily fixed at one percent (1%) of the amount of such guarantee offered, or the actual consideration, whichever is higher, on an annual basis! Compounding this fiscal impact is Circular No. 204/16/2023-GST, which provided crucial relief regarding personal guarantees furnished by company directors, aligning tax policy with Reserve Bank of India (RBI) mandates. Simultaneously, cross-border parent guarantees attract aggressive Reverse Charge Mechanism (RCM) scrutiny under Section 5(3) of the IGST Act and complex transfer pricing adjustments under Section 92CA. This definitive masterclass provides corporate CFOs, finance directors, and tax counsel with an exhaustive technical guide to Rule 28(2) valuation mechanics, retrospective dispute defenses, worked numerical models, and compliance tracking inside the assureOffice ecosystem.

• Statutory Basis of Guarantee Taxation: Section 7(1)(c) read with Schedule I (Paragraph 2), the definition of related persons under Explanation to Section 15, and the concept of supply without consideration.
• Rule 28(2) Statutory Valuation Architecture: Granular deconstruction of the 1% deemed valuation benchmark, annual frequency rules, and comparison with open market values.
• The Second Proviso to Rule 28 Disconnect: Why Rule 28(2) overrides the general Second Proviso (invoice value deemed open market value where recipient is eligible for full ITC).
• Director Personal Guarantees (Circular No. 204/16/2023-GST): RBI Master Circular prohibitions on director guarantee commissions and why open market value of promoter guarantees is legally Nil.
• Cross-Border AE Guarantees & RCM Traps: Import of services under Notification No. 10/2017-IT(R) when an overseas holding company guarantees an Indian subsidiary's loan, and Transfer Pricing safe harbours (Rule 10TD).
• 7 Real-World Case Studies: Worked numerical illustrations covering parent-subsidiary guarantees, multi-year credit lines, co-borrower structures, director personal guarantees, and offshore bank facilities.
• Technology Automation: Seamless guarantee register tracking, amortized annual GST liability scheduling, and notice defense management using assureTax and assureFinancials.

1. Statutory Architecture: Schedule I, Rule 28(2) vs. General Valuation

To grasp the legal foundation of GST on guarantees, tax practitioners must analyze the statutory interplay between taxable supply definitions and valuation rules. Under Section 7(1)(c) of the CGST Act, activities specified in Schedule I, made or agreed to be made without a consideration, constitute a taxable supply. Paragraph 2 of Schedule I encompasses 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.

Under the Explanation to Section 15 of the CGST Act, persons are deemed to be "related persons" if one directly or indirectly controls the other, or if a third person directly or indirectly controls both. Consequently, holding companies and their subsidiaries, fellow subsidiaries under common group control, and directors and their companies qualify as related persons. Prior to October 2023, valuation was governed by generic Rule 28; the insertion of sub-rule (2) created a specialized, non-rebuttable valuation regime. The table below delineates the statutory differences:

2. Deep-Dive Technical Mechanics: Rule 28(2) Valuation Architecture

The insertion of Rule 28(2) into the CGST Rules marked a structural departure from commercial reality. Under normal banking conventions, corporate guarantee charges in arm's length transactions range between 0.20% and 0.50% per annum, depending on the credit rating of the borrower and underlying collateral. By prescribing an arbitrary 1% benchmark, the government created a high deemed-tax liability.

2.1 Deconstructing the Text of Rule 28(2)

Rule 28(2) provides:

Notwithstanding anything contained in sub-rule (1), 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 deemed to be one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher.

Critical elements of this statutory formula require strict attention:

1. "Amount of Guarantee Offered" vs "Sanctioned Loan Amount" vs "Loan Drawn Down": Tax authorities initially issued notices demanding 1% GST on the total sanctioned loan amount or the peak drawn-down limit. However, the statute explicitly uses the phrase "amount of such guarantee offered". The guarantee amount is the maximum contingent legal liability undertaken by the guarantor in the corporate guarantee deed executed with the bank, regardless of whether the subsidiary has drawn down the loan or whether the balance is zero!
2. Annual Recurring Levy (Circular No. 204/16/2023-GST): The CBIC clarified in Circular 204 that providing a corporate guarantee is not a one-time event; it is a continuous supply of service. Consequently, the value of 1% applies per annum. If a corporate guarantee of ₹100 Crore is issued for a 5-year loan, GST of 18% on ₹1 Crore (₹18 Lakh) must be paid every year for 5 years (Total GST: ₹90 Lakh)!
3. The Non-Obstante Override of the Second Proviso: In standard cross-charge transactions, the Second Proviso to Rule 28 allows companies to adopt nominal or nil invoice values if the recipient branch is entitled to full ITC. Because Rule 28(2) starts with "Notwithstanding anything contained in sub-rule (1)", tax authorities take the rigid stance that the Second Proviso cannot be invoked for corporate guarantees! Therefore, even if the subsidiary is a 100% taxable manufacturing unit eligible for full ITC, the parent must bill 1% and discharge 18% GST.

2.2 The Circular 204 Relief on Director Personal Guarantees

Prior to Circular 204, tax departments issued aggressive summons to company promoters, demanding 18% GST on 1% of the value of personal guarantees extended to secure corporate bank credit facilities, often running into hundreds of crores.

The CBIC definitively eliminated this threat by harmonizing GST with banking regulations. Under the Reserve Bank of India (RBI) Master Circular on Guarantees and Co-obligations, commercial banks are strictly prohibited from paying any commission, fee, or remuneration to directors for providing personal guarantees to secure loans granted to their companies (except under rare circumstances where an ex-director continues to guarantee a loan post-resignation). Paragraph 1 of Circular No. 204/16/2023-GST established:

• Because the director is legally prohibited by RBI from receiving any consideration or commission for extending a personal guarantee, there is no commercial price for such a service.
• The Open Market Value (OMV) of such service between unrelated persons is Zero (Nil).
• Consequently, where no consideration is paid by the company to the director, the taxable value of the personal guarantee is Nil, and no GST is payable!

3. Cross-Border Intra-Group Guarantees & Transfer Pricing Interplay

The cross-border dimensions of corporate guarantees create intricate interactions between customs, GST reverse charge, and domestic transfer pricing regulations under the Income-tax Act:

3.1 Reverse Charge Liability on Inbound Guarantees (Section 5(3) IGST Act)

Where an overseas parent company located in the US, Germany, Singapore, or the UK provides a corporate guarantee to an Indian bank or international consortium to secure a foreign currency loan or domestic credit facility for its Indian subsidiary, the transaction constitutes an import of service from a related person without consideration under Section 7(1)(c) read with Schedule I.

Under Notification No. 10/2017-Integrated Tax (Rate), the recipient Indian subsidiary is required to pay 18% IGST under Reverse Charge Mechanism (RCM) in cash through the electronic cash ledger in Table 3.1(d) of Form GSTR-3B. Following the notification of Rule 28(2), the value of this imported service is deemed to be 1% per annum of the guaranteed amount! If the Indian subsidiary effects taxable outward supplies, it can simultaneously claim this 18% IGST as input tax credit in Table 4(A)(1), resulting in a revenue-neutral cash rotation, albeit creating substantial working capital lockups.

3.2 Direct Tax Transfer Pricing Interplay (Section 92CA & Rule 10TD)

Under Section 92B of the Income-tax Act, 1961 (and Section 165 of the Income-tax Act, 2025), the provision of a corporate guarantee to or on behalf of an Associated Enterprise (AE) is statutorily classified as an "International Transaction". The Indian transfer pricing regulations require the guarantee to be benchmarked against an Arm's Length Price (ALP).

Under the Safe Harbour Rules (Rule 10TD) of the Income-tax Rules:

• Where an Indian company provides a corporate guarantee to a wholly owned foreign subsidiary, the minimum safe harbour guarantee commission rate is prescribed at 1.00% per annum of the amount guaranteed (for credit ratings of BBB or higher) or 1.50% to 2.00% for lower credit ratings.
• Corporate tax controllers must ensure consistency: if an Indian parent company bills a 1% guarantee fee to its foreign subsidiary to comply with Income Tax Safe Harbour Rule 10TD, that exact 1% fee must be reconciled with outward taxable supplies in Form GSTR-1 and GSTR-3B, tracked via assureTP!

4. Constitutional & High Court Litigation Landscape

The arbitrary prescription of a 1% deemed value under Rule 28(2) has triggered severe constitutional challenges across Indian High Courts (including the Delhi, Gujarat, and Bombay High Courts):

1. Ultra Vires Section 15: Petitioners argue that Section 15(4) of the CGST Act empowers the executive to make rules for determining value where transaction value is unavailable, but it does NOT authorize the executive to create a rigid, fictional deemed percentage (1%) that ignores actual commercial market realities.
2. Violation of Article 14 (Equality): Rule 28(2) treats fundamentally different companies identically: a AAA-rated blue-chip conglomerate providing a guarantee carries negligible default risk (where market fee is 0.1%), yet it is taxed at the identical 1% rate as a high-risk distressed SME (where risk is substantially higher).
3. Retrospective Disallowance: Prior to October 26, 2023, Rule 28(2) did not exist. Tax authorities issuing retrospective show-cause notices for FY 2017-18 to FY 2022-23 face strong judicial resistance, as statutory amendments imposing substantive tax burdens cannot operate retrospectively without explicit legislative mandate.

Tax audit teams use assureNotice to manage statutory writ dockets and maintain comprehensive defense files during ongoing assessments.

5. Real-World Practical Case Studies & Worked Numerical Illustrations

Case Study 1: Parent Company Guaranteeing a Term Loan for an Indian Subsidiary

Scenario: Titan Industrial Infra Ltd. (Holding Company in Mumbai) executed a corporate guarantee deed in favor of ICICI Bank on April 1, 2025, securing a 5-year term loan facility of ₹200 Crore sanctioned to its 100% subsidiary, Titan Energy Ltd. (in Gujarat). The guarantee deed specifies that the guarantee is effective for the entire 5-year loan tenure. Titan Industrial charges no monetary fee from its subsidiary.

GST Valuation & Tax Mechanics under Rule 28(2):

• Guarantee Amount Offered = ₹200 Crore.
• Deemed Annual Taxable Value under Rule 28(2) = 1.00% of ₹200 Crore = ₹2,00,00,000 per annum.
• Applicable GST Rate = 18% IGST (inter-state supply between Maharashtra and Gujarat).
• Annual GST Liability: ₹2,00,00,000 × 18% = ₹36,00,000 IGST per year.
• 5-Year Cumulative Impact: ₹36,00,000 × 5 = ₹1,80,00,000 IGST.

Compliance Action: Titan Industrial issues an annual tax invoice of ₹2 Crore + ₹36 Lakh IGST on April 1 of each financial year, reporting it in Form GSTR-1 and GSTR-3B. Titan Energy claims ₹36 Lakh as ITC in Table 4(A)(5) of its GSTR-3B, fully reconciled in assureTax.

Case Study 2: Promoter Personal Guarantee Securing Working Capital Limits

Scenario: Ramesh Varma, Promoter and Managing Director of Varma Textiles Ltd., extended a personal guarantee to HDFC Bank on July 1, 2025, pledging his personal real estate properties to secure a ₹50 Crore cash credit limit for the company. Varma Textiles paid zero commission or remuneration to Ramesh.

Tax Treatment:

• Under the RBI Master Circular on Guarantees, directors are prohibited from receiving guarantee fees.
• Under CBIC Circular No. 204/16/2023-GST, the Open Market Value of a director's personal guarantee where no consideration is paid is statutorily deemed to be Zero (Nil).
• GST Liability: ₹0.00. Varma Textiles is not required to issue a self-invoice or pay GST under reverse charge. The tax auditor validates the board resolution confirming zero remuneration.

Case Study 3: Inbound Corporate Guarantee from Overseas Parent Entity (RCM)

Scenario: GlobalTech Inc. (USA) executed a corporate guarantee in favor of Citibank London securing an External Commercial Borrowing (ECB) of USD 10 Million (₹85 Crore) availed by its Indian subsidiary, GlobalTech India Pvt. Ltd., on November 1, 2025.

Reverse Charge Analysis:

• Import of financial support service from a related person under Section 7(1)(c) read with Schedule I.
• Under Rule 28(2), the deemed annual value is 1% of ₹85 Crore = ₹85,00,000.
• GlobalTech India must pay 18% IGST under RCM: ₹85,00,000 × 18% = ₹15,30,000.
• The tax is discharged in cash via Table 3.1(d) of Form GSTR-3B for November 2025. Because GlobalTech India is a 100% software exporter operating under LUT, it simultaneously avails ₹15,30,000 as ITC in Table 4(A)(1) and subsequently claims refund under Rule 89(4).

Case Study 4: Partial Loan Draw-Down vs Full Guarantee Offered

Scenario: InfraGrid Ltd. provided a corporate guarantee of ₹100 Crore to Power Finance Corporation (PFC) for a renewable project executed by its subsidiary. In FY 2025-26, the subsidiary drew down only ₹20 Crore of the sanctioned facility, leaving ₹80 Crore undrawn.

Valuation Dispute: The subsidiary contended that GST should be computed on 1% of the drawn-down balance (₹20 Crore), yielding a value of ₹20 Lakh. The tax auditor corrected this: Rule 28(2) explicitly mandates 1% on the "amount of guarantee offered" (the contingent liability of ₹100 Crore), resulting in a taxable value of ₹1,00,00,000 and GST of ₹18,00,000. Failing to adopt the full offered amount would trigger automated reassessment demands under Section 73.

Case Study 5: Multi-Party Joint Guarantee Allocation

Scenario: Two joint venture partner companies, Alpha Ltd. (60% stake) and Beta Ltd. (40% stake), jointly and severally guaranteed a bank credit facility of ₹150 Crore for their joint venture project company, OmniJV Ltd.

Valuation Apportionment:

• Total guarantee value = ₹150 Crore. Total 1% deemed value = ₹1,50,00,000.
• Alpha Ltd. (60% share): Deemed value = ₹90,00,000; GST @ 18% = ₹16,20,000.
• Beta Ltd. (40% share): Deemed value = ₹60,00,000; GST @ 18% = ₹10,80,000.
• Each JV partner raises an independent tax invoice for its respective proportion, fully recorded in assureFinancials.

Case Study 6: Pre-October 2023 Retrospective SCN Defense

Scenario: In January 2026, the DGGI issued an SCN to MegaCorp Ltd. demanding ₹1.8 Crore GST for FY 2019-20 to FY 2022-23 on corporate guarantees provided to its subsidiaries, retroactively applying the 1% rate under Rule 28(2).

Legal Defense: MegaCorp filed a writ petition challenging the notice, establishing that: (a) Rule 28(2) was inserted prospectively on October 26, 2023; (b) Prior to that date, the Second Proviso to Rule 28 governed related-party transactions, and because all subsidiaries were eligible for full ITC, the open market value was legally deemed to be the invoice value (Nil); and (c) Delegated legislation cannot impose retrospective tax burdens without express statutory power. High Courts have consistently granted interim stays against such retrospective demands.

Case Study 7: Transfer Pricing Guarantee Safe Harbour vs GST Rule 28(2)

Scenario: Bharat Auto Ltd. guaranteed a USD 5 Million loan for its foreign subsidiary in the UK and charged a 1.00% guarantee commission to comply with Income Tax Transfer Pricing Safe Harbour Rule 10TD. It declared ₹40,00,000 as outbound service income.

Alignment: Under GST, outbound supply of services to a foreign subsidiary is evaluated for zero-rated export status under Section 2(6) of the IGST Act. However, because foreign currency was realized, it qualifies as a zero-rated export of service under LUT. The 1% guarantee fee is perfectly harmonized across Form 3CEB and Form GSTR-1, eliminating audit discrepancies.

6. Step-by-Step Audit & Compliance Verification Protocol

To insulate enterprise corporate groups from guarantee-related GST penalties, tax teams should operationalize the following 10-step protocol:

7. Comprehensive Practitioner FAQ Bank (16 Detailed Technical FAQs)

Q1: When did Rule 28(2) of the CGST Rules come into force?

Rule 28(2) was inserted into the CGST Rules via Notification No. 52/2023-Central Tax, dated October 26, 2023. It prescribes a deemed taxable value of 1% per annum of the guarantee amount offered for corporate guarantees provided between related persons.

Q2: Does GST apply to personal guarantees provided by promoter-directors without consideration?

No. Under CBIC Circular No. 204/16/2023-GST, because the RBI Master Circular strictly prohibits banks from paying commission to directors for providing personal guarantees, the Open Market Value of such personal guarantees is accepted as Zero (Nil). No GST is payable if no consideration is paid.

Q3: Is the 1% valuation under Rule 28(2) a one-time levy or an annual recurring charge?

Circular No. 204/16/2023-GST clarified that providing a guarantee is a continuous supply of service. Consequently, the 1% deemed value applies per annum for each year or part thereof during which the guarantee remains active.

Q4: Can a company invoke the Second Proviso to Rule 28 to adopt a Nil value for corporate guarantees if the subsidiary has full ITC?

No. Because Rule 28(2) begins with a specific non-obstante clause ("Notwithstanding anything contained in sub-rule (1)..."), tax authorities take the strict stance that Rule 28(2) completely overrides the Second Proviso. Corporate entities must issue tax invoices charging 18% GST on the 1% value.

Q5: Is GST calculated on the loan amount sanctioned, loan drawn down, or the guarantee amount?

Under the explicit wording of Rule 28(2), GST is calculated on the "amount of such guarantee offered". This refers to the maximum contingent legal liability undertaken by the guarantor in the corporate guarantee deed, irrespective of the actual drawn-down loan balance.

Q6: Does an overseas parent company providing a guarantee to an Indian subsidiary attract GST?

Yes. An overseas parent guaranteeing an Indian subsidiary's loan constitutes an import of service from a related person under Section 7(1)(c) read with Schedule I. The Indian subsidiary must pay 18% IGST under Reverse Charge Mechanism (RCM) on 1% of the guarantee value annually.

Q7: Can the Indian subsidiary claim input tax credit for the GST paid on corporate guarantees?

Yes. If the subsidiary uses the underlying borrowed funds for its taxable business operations, the 18% GST charged by the parent (or paid under RCM) is fully creditable as Input Tax Credit under Section 16(1) in Table 4(A) of Form GSTR-3B.

Q8: What happens to corporate guarantees issued prior to October 26, 2023? Can authorities demand tax retrospectively?

Tax demands for the pre-October 26, 2023 period are actively challenged in various High Courts. Taxpayers have strong legal arguments that Rule 28(2) is prospective and that for past periods, the Second Proviso to Rule 28 protected fully creditable subsidiaries from deemed valuations.

Q9: If a corporate guarantee is revoked or cancelled during the year, is GST pro-rated?

Yes. If a guarantee is formally discharged by the bank upon loan closure mid-year, the annual 1% deemed value is apportioned on a pro-rata basis for the number of days the guarantee remained in effect during that financial year.

Q10: Does a letter of comfort or non-binding sponsor support undertaking attract Rule 28(2)?

No. A non-binding letter of comfort or moral support declaration that does not create an enforceable legal obligation to discharge the borrower's debt upon default does not constitute a "corporate guarantee" under the Indian Contract Act, 1872, and falls outside Rule 28(2).

Q11: If an Indian parent charges a 0.5% fee from its subsidiary, what is the taxable value under Rule 28(2)?

Rule 28(2) specifies that value shall be "one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher". Because 1.0% is higher than the actual fee of 0.5%, the taxable value is mandated at 1.0%!

Q12: If an Indian parent charges a 1.5% fee, what is the taxable value?

Because the actual consideration of 1.5% exceeds the 1.0% deemed floor, the taxable value is the actual consideration of 1.5%.

Q13: How does Rule 28(2) interact with Transfer Pricing Safe Harbour Rule 10TD?

Under Income Tax Rule 10TD, the safe harbour guarantee fee for wholly owned foreign subsidiaries is typically 1.00% per annum. Charging a 1% fee harmonizes direct tax transfer pricing compliance with GST valuation, avoiding cross-statutory disputes.

Q14: Are co-borrowers treated as providing corporate guarantees to each other?

Where group entities are joint co-borrowers and jointly and severally liable for a loan facility utilized jointly, each party is an active primary obligor. However, if one entity pledges credit support solely for funds consumed by another related entity, Rule 28(2) exposure arises on the underlying guarantee.

Q15: What documentation must a company maintain to defend director personal guarantees during an audit?

The company should maintain: (a) Bank loan sanction letters explicitly requiring promoter personal guarantees; (b) Board resolutions approving the borrowing and recording that no commission is payable to the director; and (c) A reference copy of CBIC Circular No. 204/16/2023-GST.

Q16: How does assureOffice automate corporate guarantee GST compliance?

The assureOffice ecosystem provides assureTax for automated Rule 28(2) 1% annual tax scheduling and RCM tracking, assureFinancials for multi-year contingent liability registers, and assureNotice for automated defense against retrospective guarantee assessment notices.