GST on Corporate Guarantee: Valuation under Rule 28 and CBIC Clarification
Please note the recent amendment to Rule 28 of the CGST Rules, 2017 vide Notification No. 52/2023 – Central Tax dated 26 October 2023, which introduces a deemed valuation mechanism for the supply of services by way of providing a corporate guarantee to a banking company or financial institution on behalf of a related party. From a wider taxation perspective, this amendment is particularly relevant for holding companies and group entities extending guarantees for subsidiary borrowings or related-party credit facilities.
Valuation of Corporate Guarantee under GST
In cases where a corporate guarantee is given by a holding company or one related person to a bank or financial institution on behalf of its subsidiary or another related party, the value of supply is now deemed to be the higher of the following:
- 1% of the amount of such guarantee offered, or
- the actual consideration
This deeming provision is significant because it prescribes a minimum taxable value even where the transaction is between related parties and the actual commercial consideration may be nominal or absent. Accordingly, group entities should review guarantee structures and related-party financing arrangements from a GST advisory and compliance standpoint.
Applicable GST Rate on Corporate Guarantee
The applicable GST rate on the above value of supply is 18% as per the provisions of the GST law. Therefore, where a corporate guarantee falls within the amended Rule 28 framework, the tax exposure is not limited to valuation alone; the service is also subject to GST at the standard applicable rate.
CBIC Clarification on Personal Guarantee by Directors
In addition, the CBIC has clarified through Circular No. 204/16/2023-GST dated 27 October 2023 that where a director provides a personal guarantee to a bank for securing credit facilities for the company, the open market value of such guarantee will be considered Nil, provided no consideration is received by the director.
Accordingly, in such cases, no GST is payable. This is an important distinction because the circular separately addresses personal guarantees by directors and avoids automatic taxability where there is no underlying consideration.
Why This Amendment Matters for Businesses
This amendment has direct implications for businesses using internal group support arrangements to secure financing. Corporate guarantees between related parties can now create a deemed taxable value even where the guarantee is not separately charged. As a result, companies should reassess:
- related-party guarantee structures
- documentation around inter-company financing support
- potential GST liability on deemed valuation
- litigation exposure where older positions were adopted differently
Given the valuation and interpretational issues involved, businesses may also need to review these arrangements through an indirect tax litigation or GST health check lens where existing positions are exposed to scrutiny.
If you require assistance with GST valuation, related-party transactions, or indirect tax compliance, please reach out to us.