Corporate Guarantees In GST: Supply, Consideration And Deemed Valuation

A corporate guarantee is a contractual arrangement whereby one entity undertakes to assume responsibility for the debt/obligations of another entity upon default. Such guarantees are commonly issued within corporate groups, typically by parent companies in favour of subsidiaries or related entities, to enable such entities to obtain financing from financial institutions.

Under both the erstwhile Service Tax regime and the GST regime, the Department has consistently taken the position that the issuance of a corporate guarantee constitutes a service rendered by the guarantor and is therefore exigible to tax.

In the erstwhile regime, the Hon’ble Supreme Court, in Commissioner of CGST and Central Excise v. M/s Edelweiss Financial Services Ltd., 2023 (73) GSTL 4 (SC), held that where corporate guarantees are provided to banks or financial institutions for extending loans to a subsidiary or related entity, without any consideration, such transactions are not taxable. The Court held that taxability under Section 66B of the Finance Act, 1994 requires the existence of both a service provider and consideration, whether monetary or otherwise. In the absence of either element, no service tax could be levied. The judgment was rendered upholding the decision of the Tribunal, which had similarly found that since no consideration was charged by the parent entity from its subsidiary for furnishing the corporate guarantee, no service tax was payable

As an aside, the CESTAT’s decision in DLF Cyber City Developers Limited v. CST, Delhi-IV, Appeal No. ST/60753/2017 dated 22.05.2019, wherein the Tribunal held that in the absence of consideration, and in the absence of the Department establishing that procurement of corporate guarantees lead to a lower interest rate, the difference being the consideration, the issuance of corporate guarantee would not be taxable in service tax. The Revenue’s appeal has been admitted and is presently pending before the Hon’ble Supreme Court (Commissioner of Service Tax Audit II Delhi IV v. DLF Cyber City Developers Ltd., Civil Appeal No. 428/2020 at Diary No.42703/2019).

Seven months after the decision in Edelweiss was rendered, the Government inserted sub-rule (2) to Rule 28 of the Central Goods and Services Tax Rules, 2017 (“Rules”), vide Notification No. 52/2023-Central Tax, dated 26.10.2023 with prospective effect, prescribing a deemed valuation mechanism for corporate guarantees issued between related parties. This has reignited controversy.

While the Revenue seeks to rely upon the amendment to Rule 28 to contend that corporate guarantees was always taxable irrespective of consideration, and the introduction of the rule was only to prescribe a valuation. On the contrary, the assessees continue to argue that valuation provisions cannot create a taxable supply where none exists in law.

In this article, we analyse the statutory framework governing corporate guarantees under GST, the impact of the Supreme Court’s decision in Edelweiss, the effect of Rule 28(2), and the emerging judicial position on the issue.

The taxable event in GST is “supply”, the scope of which is set-out in Section 7 of the Central Goods and Services Tax Act, 2017 (“Act”). Section 7(1)(a) provides that supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal, made or agreed to be made for a consideration by a person in the course or furtherance of business. Section 7(1)(c) further includes within the ambit of supply, the activities specified in Schedule I, even if made without consideration.

Entry 2 of Schedule I covers supply of goods or services or both between related persons, when made in the course or furtherance of business. Consequently, it is the Department’s position that corporate guarantees issued by a holding company to its subsidiary would constitute a taxable supply even in the absence of consideration, on account of the deeming fiction contained in Schedule I.

However, a reading of Section 7 indicates that Schedule I only dispenses with the requirement of consideration in specified cases. The existence of an activity in the nature of “supply” itself nevertheless remains a quintessential requirement. In other words, the activity must first qualify as a supply of either goods or services in the course or furtherance of business, before the deeming fiction relating to consideration can operate.

This becomes relevant in context of corporate guarantees, where the guarantee is issued without any separate commission or consideration and is issued merely to protect the commercial and financial interests of the group.

In Edelweiss, the Court upheld the Tribunal’s view that alleged “non-monetary benefits” cannot be used to artificially infer consideration for the purpose of creating taxability itself. The distinction between taxability and valuation is important. While valuation provisions may determine the measure of levy, they cannot themselves create the levy in the absence of a taxable service.

Though rendered under the Finance Act, 1994, the reasoning in Edelweiss has substantially influenced GST disputes concerning corporate guarantees as well, especially since the concept of “supply” under Section 7 also contemplates the existence of a taxable activity in the course or furtherance of business, for consideration.

Rule 28(2) of the Rules stipulates that the value of supply of services by way of providing corporate guarantee to a banking company or financial institution, on behalf of a related person, shall be deemed to be one percent of the amount guaranteed per annum, or the actual consideration charged, whichever is higher.

Pursuant thereto, Circular No. 204/16/2023-GST dated 27.10.2023 clarified that corporate guarantees issued between related parties were taxable even prior to insertion of Rule 28(2), and that the amendment merely introduced a mechanism for valuation. This has resulted in significant litigation.

The Department’s position is that once Entry 2 of Schedule I treats related party transactions as supplies even without consideration, the requirement of consideration effectively ceases to be relevant. Consequently, Rule 28(2) merely quantifies the taxable value of such supply.

Assessees, on the other hand, continue to contend that Rule 28(2) is only a valuation provision and cannot create a taxable supply where none exists. It is argued that Schedule I merely removes the requirement of consideration, but does not dispense with the requirement that there must first exist a “supply” in the course or furtherance of business. If the issuance of a corporate guarantee is not a “supply” in the first place, then the Department cannot treat a transaction as subject to tax vide a Circular.

The controversy therefore is no longer restricted merely to valuation of corporate guarantees, but extends to the more fundamental issue of whether issuance of a corporate guarantee without consideration constitutes a taxable supply at all. The issue is presently before High Courts across the country.

The Hon’ble Delhi High Court in Sterlite Power Transmission Ltd. v. Union of India, 2024 (84) G.S.T.L. 42 (Del.), granted interim protection in proceedings involving levy of GST on corporate guarantees issued by a holding company to its subsidiaries. Similar interim protection was granted by the Hon’ble Punjab and Haryana High Court in Acme Cleantech Solutions Pvt. Ltd. v. Union of India, 2024 (86) G.S.T.L. 257 (P&H.) and the Bombay High Court in Vedanta v. Union of India, W.P. 4519/2024, and Schloss HMA Pvt. Ltd. v. Union of India, W.P. 60/2025.

The Bombay High Court has also considered the issue in D P Jain & Co. Infrastructure Pvt. Ltd. v. Union of India, 2026-VIL-474-BOM. In the said case, the Court considered the impact of Edelweiss vis-a-vis Rule 28(2) and the subsequent CBIC Circular. The Bombay High Court observed that where corporate guarantees are issued without consideration, the principles laid down in Edelweiss would continue to apply. The Court also noted the distinction between a corporate guarantee issued by a holding company to secure the financial exposure of its subsidiary, and a commercial bank guarantee issued in the ordinary course of business.

The Bombay High Court’s decision in D P Jain, however, did not examine the issue of corporate guarantees issued for consideration, whether to subsidiaries or unrelated entities. Further, the guarantees in question had been extended prior to the insertion of Rule 28(2) of the Rules. Consequently, the judgment does not address whether a similar position would apply to transactions undertaken after 26.10.2023. Significantly, the Court also did not examine the impact of Schedule I to the Act, which marks a departure from the erstwhile Service Tax regime by deeming certain supplies between related persons to constitute taxable supplies even in the absence of consideration.

In this regard, another argument which has recently gained traction is that corporate guarantees constitute “actionable claims” covered under Schedule III of the Act and are therefore outside the ambit of GST. The argument proceeds on the basis that a corporate guarantee represents a contingent claim to an unsecured debt, enforceable in a civil court upon occurrence of a default by the borrower. Reliance is placed on the definition of “actionable claim” under Section 3 of the Transfer of Property Act, 1882, as well as judicial precedents recognizing contingent debt instruments as actionable claims, especially the decision of the Hon’ble Madras High Court in Tvl. Kalyan Jewellers India Ltd. v. Union of India, (2024) 14 Centax 146 (Mad.), wherein gift vouchers were held to constitute actionable claims. While the argument is interesting, it remains untested in the context of corporate guarantees.

The controversy surrounding GST on corporate guarantees raises a more fundamental question regarding the architecture of GST itself. Whether a deeming fiction relating to valuation can be extended to create taxability in the absence of an underlying supply?

The Department’s approach proceeds on the assumption that once parties are related and a corporate guarantee is issued, Schedule I automatically triggers a taxable supply. However, the Court’s view in Edelweiss, is that taxability and valuation are distinct concepts. A valuation provision may quantify a supply, but it cannot substitute the existence of supply.

This distinction becomes particularly relevant in the case of intra-group corporate guarantees issued without consideration. Guarantees are extended not as independent commercial services, but as shareholder or promoter measures intended to protect investments, improve borrowing capacity of subsidiaries, and preserve the financial stability of the group. In such situations, a separate economic supply rendered by the holding company to the subsidiary may not be identifiable.

Rule 28(2), though intended to bring certainty to valuation, has reopened the more foundational debate on whether these transactions are taxable at all. The actionable claim argument introduces a new dimension which may influence future litigation if courts are willing to view corporate guarantees as contingent debt instruments rather than services rendered by the guarantor. The issue appears to attract more litigation till the dispute is finally settled, most likely by the Apex Court.

The authors would like to acknowledge the inputs of Ms. Vanshika Gudipalli, 4^th year student at NALSAR University of Law, Hyderabad.

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