GST Treatment of Corporate Guarantees Within Group Structures: From Service Tax Legacy to Rule 28(2)

Corporate guarantees within corporate groups often begin as a commercial support mechanism: a financially stronger entity backs the borrowing of an associated company to enable access to credit. Under indirect tax law, however, this seemingly routine arrangement has travelled a long distance—from being largely outside the service tax net, to becoming a deemed supply under GST, with a dedicated valuation rule from 26.10.2023.

This article recasts that journey, integrating:

  • The commercial character of corporate guarantees
  • The earlier service tax position (including DLF Home Developers Ltd. and Edelweiss Financial Services Ltd.)
  • The GST framework under Section 7, Schedule I, Section 15 and Rule 28/Rule 28(2)
  • Post-October 2023 amendments and clarifications
  • The impact of Torrent Power Ltd. v. Union of India & Ors. on taxability and valuation

The objective is to give a time-segmented, legally grounded roadmap so that assessees can evaluate their corporate guarantee structures with clarity, especially around critical dates and valuation approaches.

1. Commercial Nature of Corporate Guarantees

Within a corporate group, legal separateness often masks operational interdependence. A holding company may incorporate multiple subsidiaries for different lines of business or geographies. These subsidiaries, especially in their early stages, frequently depend on the parent’s standing to secure credit.

A corporate guarantee is the legal instrument through which one company (the guarantor) undertakes to meet the debt obligations of another company (the principal debtor) if the latter defaults. Key commercial characteristics are:

  • The borrower remains primarily responsible for repayment
  • The guarantor’s obligation is secondary and contingent—it is triggered only upon default
  • The guarantee is typically addressed to the lender but issued “on behalf of” the borrowing group entity

This three-party structure is central both to the legal classification of the arrangement under GST and to its valuation mechanics.

1.1 Three-Party Structure and GST Relevance

A typical corporate guarantee involves:

  • Borrower (group entity seeking the loan)
  • Lender (bank/financial institution)
  • Guarantor (another group entity, often the holding company)

Under GST, this triangular relationship is important because:

  • The guarantor issues a commitment to the lender, for the benefit of the borrower
  • The borrower and guarantor are generally “related persons” under Section 15 of the CGST Act, 2017
  • Schedule I treats certain supplies between related persons as taxable even when no consideration is charged

This configuration forms the backdrop against which corporate guarantees are assessed as supplies under Section 7 and then valued under Rule 28/Rule 28(2).

1.2 Why No Guarantee Commission Is Often Charged

Intra-group corporate guarantees are frequently furnished without any explicit fee. The commercial reasoning is straightforward:

  • The parent or group entity is advancing the overall economic interest of the group
  • Supporting a subsidiary’s borrowing strengthens the investment in that subsidiary
  • The benefit is indirect and embedded in improved group performance rather than a direct commission

From a tax lens, this raises the pivotal issue: can GST apply to an arrangement where no price is agreed?

  • Under the service tax regime, the absence of consideration largely insulated such guarantees from tax.
  • Under GST, Schedule I fundamentally changes this position for related persons.

1.3 Distinguishing Corporate, Bank and Personal Guarantees

It is crucial not to conflate corporate guarantees with other types of guarantees:

  • Bank Guarantee

    • Issued by a bank in the ordinary course of business
    • Always for a fee (commission), clearly reflecting a commercial service
    • The issuer’s core business includes such activities

  • Corporate Guarantee

    • Issued by a company, usually within a group (e.g., holding for subsidiary)
    • Not generally part of the guarantor’s primary business model
    • More in the nature of internal group support

  • Personal Guarantee

    • Given by an individual (director, promoter, etc.)
    • GST treatment and valuation differ from corporate guarantees, as clarified in Circular No. 204/16/2023-GST, dated 27.10.2023

These distinctions become significant when applying GST valuation rules and CBIC clarifications.

Section 15 of the CGST Act, 2017 provides that where parties are “related,” the transaction value concept must be applied with caution. The Explanation to Section 15 treats entities as related persons where, among other things, there is control, shareholding, or management influence—this typically covers holding–subsidiary relationships.

Consider a scenario:

  • M/s. XYZ Holdings Ltd. holds 100% of M/s. LMN Projects Ltd.
  • M/s. XYZ Holdings Ltd. provides a corporate guarantee to a bank for a term loan sanctioned to M/s. LMN Projects Ltd.
  • No guarantee fee is charged

Even though no consideration passes from M/s. LMN Projects Ltd. to M/s. XYZ Holdings Ltd., the two are related persons and GST must be examined through Schedule I.

2.2 Deemed Supply Without Consideration: Schedule I

Section 7 defines “supply” and is supplemented by Schedule I, which prescribes certain transactions deemed to be supplies even without consideration. Paragraph 2 of Schedule I states:

“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.”

Implications for corporate guarantees:

  • The absence of consideration does not prevent such intra-group guarantees from being treated as supplies
  • Once Schedule I (para 2) conditions are satisfied, the arrangement becomes a taxable supply under GST

This deeming provision marks a clear departure from the consideration-centric test under the earlier service tax regime. It also sets the stage for the distinct question of valuation—how to quantify value where no price has been agreed.

3. Service Tax Position: Consideration as a Precondition

Under service tax, the statutory scheme was built around the concept of consideration:

  • Section 65B(44) of the Finance Act, 1994 defined “service” as an activity carried out for consideration
  • Without consideration, the activity did not qualify as a “service” at all
  • Valuation machinery could not be invoked to create a taxable service where the definitional requirement itself failed

3.1 DLF Home Developers Ltd.

In `DLF Home Developers Ltd. v.