GST on Corporate Guarantees in India 2026: Holding–Subsidiary Guarantees, Rule 28(2), 1% Valuation, ITC and Companies Act Approvals

By Adv. Govind Bali | Fastrack Legal Solutions LLP
Legally reviewed: 7 September 2026

1. Why Corporate Guarantees Became a Major GST Issue

Indian groups routinely use parent or affiliate guarantees to support working-capital facilities, project finance, term loans and external commercial borrowings. Historically, many guarantees were issued without a separate fee because the economic purpose was group financing rather than an independent guarantee business.

GST changed that analysis because supplies between related persons can be taxable even without consideration. Rule 28(2), introduced from 26 October 2023 and later amended retrospectively, created a specific valuation mechanism for related-party corporate guarantees to banks and financial institutions.

2. Why a Free Corporate Guarantee Can Still Be a Taxable Supply

Holding and subsidiary companies are related persons for GST purposes. Schedule I can treat supplies between related persons made in the course or furtherance of business as supply even if made without consideration.

The 52nd GST Council material and CBIC clarifications expressly address corporate guarantees between related companies. The legal assumption is that the guarantor supplies a service by undertaking default risk for the related recipient.

3. Rule 28(2): The Current Valuation Rule

For a corporate guarantee provided to a banking company or financial institution on behalf of a related recipient, Rule 28(2) provides a specific valuation mechanism. CBIC Circular No. 225/19/2024-GST clarifies the operation of the rule after Notification No. 12/2024-Central Tax.

The circular is available through the GST Council/CBIC record.

4. One Per Cent Per Annum—Not One Per Cent Forever

The clarification states that the value is one per cent of the amount guaranteed per annum or the actual consideration, whichever is higher. The duration of the guarantee therefore matters.

If a guarantee for ₹100 crore is issued for five years, the Rule 28(2) benchmark can operate as 5% of the amount guaranteed for the five-year term, subject to the full-ITC proviso and other applicable facts. If a guarantee is for six months, proportional valuation may be applied.

5. Fixed Multi-Year Guarantee vs Annual Renewal

CBIC distinguishes a guarantee issued once for a fixed multi-year term from a one-year guarantee renewed repeatedly.

• For a fixed five-year guarantee, valuation can reflect 1% per year multiplied by five, with tax becoming payable according to the applicable time-of-supply framework.
• For a one-year guarantee renewed annually, each renewal is separately relevant and the one-per-cent valuation applies to the renewed guarantee period.

Loan documentation should therefore clearly state guarantee commencement, expiry and renewal mechanics.

6. Value Is Based on Amount Guaranteed, Not Loan Actually Disbursed

CBIC clarified that the service is the assumption of risk and is not dependent on how much of the sanctioned facility is actually drawn. Therefore, the valuation is based on the amount guaranteed, not merely the amount of loan disbursed at a particular moment.

This can materially increase GST exposure for large undrawn credit lines. Treasury teams should consider the GST cost when negotiating the guarantee cap.

7. Full ITC Changes the Valuation Outcome

One of the most important 2024 amendments inserted a proviso into Rule 28(2) similar to the full-ITC deeming rule in Rule 28(1). Where the recipient is eligible for full input tax credit, the value declared in the invoice is deemed to be the value of the supply.

This means the mechanical one-per-cent benchmark should not be applied without first checking the recipient’s full-ITC position. Corporate groups should document why full ITC is available rather than merely putting a nominal value on the invoice without analysis.

8. Domestic Guarantee: Forward Charge

Where an Indian related company provides the corporate guarantee for another Indian related entity, CBIC clarifies that GST is payable by the domestic guarantor under the forward-charge mechanism and an invoice should be issued to the recipient entity.

The recipient may claim ITC subject to the normal statutory conditions.

9. Foreign Parent or Overseas Related Guarantor: Reverse Charge

Where an overseas related entity provides a guarantee for an Indian related recipient, CBIC has clarified that GST is payable under reverse charge by the Indian recipient, subject to the applicable place-of-supply and import-of-services framework.

Cross-border treasury teams should coordinate GST and FEMA/ECB documentation. The invoice or accounting support should identify the guarantor, facility, term, guaranteed amount and valuation basis.

10. Export of Corporate Guarantee Service

Rule 28(2) expressly does not apply where the recipient of the corporate guarantee service between related persons is located outside India. That does not automatically mean every outbound guarantee is tax-free; the transaction must still be analysed under the IGST Act’s export-of-services conditions and place-of-supply rules.

11. Guarantees Issued Before 26 October 2023

CBIC clarified that Rule 28(2) is a valuation rule and does not create the taxability itself. Corporate guarantees between related persons could be taxable even before 26 October 2023. But guarantees issued or renewed before that date are valued under Rule 28 as it existed at the relevant time.

For legacy audits, therefore, do not apply the post-26 October 2023 one-per-cent formula retrospectively to periods where the rule did not govern.

12. Loan Takeover by Another Bank

A mere takeover or assignment of the loan from one bank to another does not itself create a fresh guarantee supply if no fresh corporate guarantee is issued or existing guarantee renewed. If the takeover is accompanied by a fresh guarantee, GST implications arise on that new guarantee.

Finance teams should preserve takeover letters and guarantee-continuation documents to show whether a new service was actually supplied.

13. Multiple Co-Guarantors

Where several related entities jointly guarantee the same borrowing, Circular 225 explains proportional valuation. If actual aggregate consideration exceeds the benchmark, actual consideration governs; otherwise, each guarantor’s share of the one-per-cent benchmark is allocated according to the amount guaranteed by that entity.

Inter-company guarantee agreements should therefore state each guarantor’s maximum exposure.

14. Personal Guarantee by Director Is Different

Do not confuse a corporate guarantee by a holding company with a personal guarantee given by a director. CBIC’s earlier Circular No. 204/16/2023-GST separately addressed personal guarantees by directors. Rule 28(2)’s special one-per-cent corporate-guarantee formula is not the valuation rule for a director’s personal guarantee.

This distinction is important where financing documents include both parent-company and promoter guarantees.

15. Companies Act: Board Power to Give Guarantees

GST is only one layer. Under the Companies Act, the power to grant loans or give guarantees is a board-level matter under Section 179(3), subject to the Act, articles and delegations permitted by law.

The board resolution should identify borrower, lender, facility amount, guarantee cap, term, commercial rationale and authorised signatories.

16. Section 186: Limits and Shareholder Approval

Section 186 regulates loans, guarantees, securities and investments by companies. Transactions beyond the statutory financial thresholds can require prior special resolution of shareholders, subject to the section’s exceptions and conditions.

Before issuing a group guarantee, calculate the company’s aggregate exposure under Section 186 rather than treating each guarantee in isolation. Maintain the statutory register and disclosure trail.

17. Section 185: Director-Connected Entities

Where a guarantee supports borrowing by a person or entity connected to directors, Section 185 may become relevant. Certain transactions are prohibited; others can proceed subject to statutory conditions and shareholder approval. The exact ownership and director-interest structure should be checked before execution.

A tax-compliant guarantee can still be company-law defective if corporate approvals are wrong.

18. Related-Party Governance

Depending on the entities involved, related-party approval, audit committee oversight or listed-company regulations may also apply. Listed groups should additionally examine SEBI LODR requirements and materiality policies.

19. Transfer Pricing and Corporate Guarantee Fees

For cross-border related parties, income-tax transfer pricing may require an arm’s-length guarantee fee even where GST uses a separate valuation framework. The GST invoice value and transfer-pricing benchmark should therefore be reconciled rather than developed by separate teams in isolation.

20. Accounting and Time-of-Supply Controls

The tax team should receive the guarantee document before execution, not months later at annual audit. The accounting entry should capture guaranteed amount, term, fee if any, GST valuation method, invoice date, tax charge and recipient ITC treatment.

21. Corporate Guarantee Audit File

• Board resolution under Section 179
• Section 186 computation and approvals
• Section 185 analysis where relevant
• Shareholder resolution where required
• Loan sanction letter
• Executed guarantee
• Term and guaranteed amount
• Related-party relationship chart
• Rule 28(2) valuation working
• Full-ITC analysis
• GST invoice
• GSTR-1/3B reporting
• Recipient ITC record
• Foreign-guarantor RCM working, if applicable

22. Common Mistakes

• Assuming no fee means no GST.
• Applying 1% once regardless of guarantee duration.
• Using actual loan drawdown instead of amount guaranteed.
• Ignoring the full-ITC proviso.
• Charging Indian forward GST where guarantor is foreign and RCM applies.
• Applying Rule 28(2) to export cases where it is excluded.
• Ignoring Companies Act Sections 179, 185 and 186.
• Failing to distinguish corporate and personal guarantees.

23. Frequently Asked Questions

Is a free guarantee from holding company to subsidiary taxable?

It can be, because related-party supplies can be taxable even without consideration. Rule 28(2) then addresses valuation for the specified corporate-guarantee service.

Is GST value always 1%?

No. The statutory rule is one per cent of the amount guaranteed per annum or actual consideration, whichever is higher, subject to the full-ITC proviso and other clarifications.

If full ITC is available, does 1% still control?

The 2024 proviso allows the invoice value to be deemed the value of supply where full ITC is available to the recipient.

What if the parent company is outside India?

For an overseas related guarantor supporting an Indian recipient, CBIC clarifies that GST is payable under reverse charge by the Indian recipient, subject to applicable law.

Do we need board approval?

Corporate guarantees are a board-governance matter under the Companies Act and may also trigger Sections 185/186 and shareholder approvals depending on the facts.

24. Conclusion

A corporate guarantee is simultaneously a financing instrument, related-party transaction, Companies Act decision and GST supply. Treating it as a one-page bank form creates avoidable tax and governance exposure.

Every material group guarantee should therefore have a single approval file linking the board resolution, statutory company-law analysis, GST valuation, invoice, ITC position and financing document.