GST on Corporate Guarantees: Taxability of No-Consideration Transactions Under Section 7(1)(c)?

Introduction

A corporate guarantee, at its simplest, is a promise made by one company — typically a parent, holding, or group entity — to discharge the debt or fulfill the obligation of another company in case of its default. Under the Indian Contract Act, 1872, Section 126 defines a “contract of guarantee” as a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person giving the guarantee is the surety, the one in respect of whose default the guarantee is given is the principal debtor, and the one to whom the guarantee is given is the creditor. Within corporate groups, these guarantees flow from holding companies downward to subsidiaries or laterally across related entities — and in almost all cases, they flow without any fee or commission.

This no-fee character of the corporate guarantee is precisely what made it invisible to tax authorities for years. Under the pre-GST service tax regime, the absence of consideration meant the absence of taxability, and courts repeatedly confirmed that position. But when GST arrived with its novel architecture — particularly the deeming provisions of Schedule I read with Section 7(1)(c) of the Central Goods and Services Tax Act, 2017 [1] — the question of whether a corporate guarantee constitutes a “supply” even without consideration became one of the most consequential and litigated questions in indirect tax law. The answer has evolved dramatically since 2017, and as of today, it remains a field of active judicial contest.

The Statutory Framework: Supply Under Section 7 of the CGST Act

The starting point of any GST analysis is the definition of “supply” under Section 7 of the CGST Act, 2017. Section 7(1)(a) defines supply as “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.” [1] On this reading, a corporate guarantee given free of charge would simply fall outside the scope of supply — there is no consideration, and the statutory text appears to demand one.

However, the legislature introduced an important exception. Section 7(1)(c) of the CGST Act extends the scope of “supply” to cover “the activities specified in Schedule I, made or agreed to be made without a consideration.” [1] Schedule I, Entry 2 then provides that “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” shall be treated as supply even if no consideration passes. This is the provision that fundamentally changes the calculus for corporate guarantees — because most guarantees within a corporate group are given between entities that qualify as “related persons” under the GST law.

The term “related persons” is defined in the Explanation to Section 15 of the CGST Act, 2017 [1]. Clause (a) of that explanation provides, among other situations, that persons shall be deemed to be related if they are officers or directors of one another’s businesses, if one of them directly or indirectly owns, controls, or holds 25% or more of the outstanding voting stock or shares of the other, or if one of them directly or indirectly controls the other. Under this definition, a holding company and its subsidiary are unambiguously related persons, and a director and the company of which he is a director are also related. These definitional anchors bring virtually every intra-group corporate guarantee within the orbit of Schedule I, and thus within the orbit of taxable supply under Section 7(1)(c). [1]

The Pre-GST Position: What the Service Tax Regime Said

Before turning to the current GST position, it is essential to understand where the law stood under the Finance Act, 1994. Under the service tax regime, a transaction was taxable only if it involved both a “service” and “consideration.” Section 65B(44) of the Finance Act, 1994 defined “service” in terms that presupposed valuable consideration, and courts read this element strictly.

The most authoritative pronouncement came from the Supreme Court in Commissioner of CGST and Central Excise v. M/s Edelweiss Financial Services Ltd., Civil Appeal Diary No. 5258 of 2023, decided on 17 March 2023 [2]. In this case, the revenue authorities had issued a show-cause notice proposing a demand of over ₹97 crores against Edelweiss Financial Services for allegedly not discharging service tax liability on corporate guarantees provided to its overseas and domestic group companies. The CESTAT had dismissed the department’s appeal, holding that “the criticality of ‘consideration’ for determination of service, as defined in section 65B(44) of Finance Act, 1994, for the disputed period after introduction of the ‘negative list’ regime of taxation has been rightly construed by the adjudicating authority. Any activity must, for the purpose of taxability under Finance Act, 1994, not only, in relation to another, reveal a ‘provider’, but also the flow of ‘consideration’ for rendering of the service. In the absence of any of these two elements, taxability under Section 66B of Finance Act, 1994 will not arise.” [2] The Supreme Court dismissed the Revenue’s appeal, finding no reason to interfere with this settled position.

This ruling, while significant, was confined entirely to the service tax regime. The Court explicitly left open the question of how GST law would treat the same transaction — and rightly so, because the GST framework introduced a structurally different mechanism for taxing transactions between related parties.

How the GST Regime Departed: The Deeming Fiction of Schedule I

Under GST, the game changed because of the deeming provision in Schedule I. Unlike service tax, GST law does not require actual consideration to flow between related parties for a transaction to be taxable. The relationship itself is treated as sufficient justification for deeming the transaction a supply. As one analytical formulation puts it, under GST, “the relationship is itself the consideration.” [3] This is a deliberate legislative choice, designed to prevent base erosion through the structuring of transactions within corporate groups.

What followed from 2017 to 2023 was a period of enormous uncertainty. The DGGI (Directorate General of GST Intelligence) began issuing show-cause notices to corporate groups in 2023, proposing to levy GST on corporate guarantees going back to the date of GST implementation. Companies that received these notices raised objections on multiple grounds — that a corporate guarantee is not a “service” in the first place, that it amounts to a shareholder function rather than a taxable activity, that it could be classified as an actionable claim under Schedule III and therefore fall outside the scope of supply altogether, and that even if it were a service, there was no valuation mechanism in law to determine the tax base. [4]

The actionable claim argument deserves brief examination. Schedule III, Entry 6 of the CGST Act excludes “actionable claims, other than lottery, betting and gambling” from the definition of supply. A corporate guarantee, it was argued, involves a contingent liability — an obligation that does not crystallize unless the principal debtor defaults. If this contingent nature qualifies it as an actionable claim, then no GST would apply. However, CBIC’s clarificatory position and the weight of academic and professional opinion have trended against this argument, since a guarantee represents a present commitment to perform, not merely a future right to claim. [4]

The 52nd GST Council and the Insertion of Rule 28(2)

The debate was substantially, though not fully, resolved through a combination of a GST Council recommendation, a notification, and a CBIC circular all issued in late October 2023.

At its 52nd meeting, the GST Council recommended that GST be levied on corporate guarantees provided by a holding company to a bank or financial institution for securing credit facilities for its subsidiary, even where no fee is charged. The Council also recommended that the value of such a deemed supply be fixed by a specific rule. Pursuant to this recommendation, Notification No. 52/2023-Central Tax dated 26 October 2023 [5] inserted sub-rule (2) in Rule 28 of the CGST Rules, 2017 [1]. Rule 28(2) provides: “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 percent of the amount of such guarantee offered, or the actual consideration, whichever is higher.” This rule applies irrespective of whether the recipient is eligible for full input tax credit, making it a hard floor for valuation. The GST rate on corporate guarantees is 18%, classified under HSN code 999799.

The day after the notification, on 27 October 2023, CBIC issued Circular No. 204/16/2023-GST [5] which addressed taxability and valuation of both personal and corporate guarantees. The Circular confirmed that where a holding company provides a corporate guarantee to a bank on behalf of its subsidiary — even without any fee — this amounts to a supply of service between related persons under Schedule I read with Section 7(1)(c), and the taxable value must be determined under Rule 28(2). The Circular further clarified the treatment of personal guarantees given by directors, confirming that since RBI Circular No. RBI/2021-22/121 dated 9 November 2021 prohibits directors from receiving any consideration (including commission or brokerage) for providing personal guarantees, the open market value of such supply is zero, and therefore no GST is payable in respect of director personal guarantees where no consideration can be paid. [5]

A further amendment followed via Notification No. 12/2024-Central Tax dated 10 July 2024, which modified Rule 28(2) to clarify that it does not apply to supplies between related parties where the recipient is located outside India, treating such transactions as exports, effective retrospectively from 26 October 2023. Additionally, Circular No. 225/19/2024-GST dated 11 July 2024 clarified that where the recipient of the corporate guarantee is eligible for full input tax credit, the value declared in the invoice shall be deemed the taxable value — meaning a nominal value such as ₹1 could be declared, effectively making the GST liability a pass-through. [3]

Judicial Pushback: The Courts Speak

Even as the CBIC issued these clarifications and the valuation mechanism took shape, multiple companies challenged the new regime in the constitutional courts, and several High Courts granted interim relief — making this one of the most active fronts of GST litigation in recent years.

In Sterlite Power Transmission Limited v. Union of India, [2024] 160 taxmann.com 381 (Delhi High Court) [6], the petitioner sought a declaration that providing a corporate guarantee to a subsidiary is not a “supply of service” taxable under Section 9 of the CGST Act. The petitioner’s central argument was that a corporate guarantee is a contingent contract — it becomes enforceable only if the lender invokes it upon the debtor’s default — and therefore the issue of service arises only at the time of enforcement, not at the time of issuance. The petitioner also argued that fixing the taxable value at 1% of the guarantee amount per annum was an onerous burden unmoored from economic reality, particularly for infrastructure companies that may guarantee amounts running into thousands of crores. The Delhi High Court issued notice to the Revenue and granted a stay against coercive action, recognizing the seriousness of the constitutional questions raised.

The most far-reaching interim order came in Acme Cleantech Solutions (P.) Ltd. v. Union of India, 2024 SCC OnLine P&H 1010, order dated 3 May 2024 [7]. A Division Bench of the Punjab and Haryana High Court, comprising Justices Sanjeev Prakash Sharma and Sukhvinder Kaur, stayed the effect and operation of CBIC Circular No. 204/16/2023-GST to the extent that it clarified that the provision of corporate guarantee between related persons, even without consideration, was to be treated as a supply of service under Schedule I. The court’s reasoning was that a circular cannot usurp adjudicatory powers — it cannot, by way of clarification, predetermine a question of fact and law that is supposed to be decided by the assessing or appellate authority on the merits of each case. The Court further directed that the appellate authority shall be free to decide the petitioner’s case without being influenced by the circular’s clarification. [7] This stay effectively provided pan-India interim relief to industry, at least with respect to demands anchored solely on the basis of Circular 204.

Other High Courts followed. The Bombay High Court in proceedings involving Vedanta Ltd. raised constitutional concerns over Rule 28(2)’s valuation methodology and stayed GST demands. The Delhi High Court in Jindal Stainless Ltd. v. Union of India (W.P.(C) 14622/2024) stayed recovery proceedings on guarantees issued by a merged entity. [8] These concurrent interventions by multiple High Courts reflect the depth of industry concern over the financial and compliance impact of the new regime.

The Valuation Problem: Why 1% Has Been Contested

The specific figure of 1% per annum as the deemed value of a corporate guarantee has attracted sustained criticism from practitioners and taxpayers alike. Critics point out that unlike bank guarantees — which involve active credit assessment, documentation, fee collection, and contingent liability management by a regulated entity — a corporate guarantee given by a holding company to a bank on behalf of a subsidiary is essentially a consequence of group structure and shareholder interest. The holding company is not providing an independent financial service; it is facilitating its own investment. To deem this equivalent to 1% of the guaranteed amount per annum, and levy 18% GST on that notional value, is to create a substantial recurring tax burden on a transaction that has no real economic parallel in the market.

There is also a legitimate question about retrospective liability. Rule 28(2) came into force on 26 October 2023. However, CBIC’s Circular 225 of July 2024 took the position that GST was always applicable on corporate guarantees between related parties even before Rule 28(2) was inserted — the rule merely provided a valuation mechanism, not a new head of taxability. This interpretation, if upheld, would expose companies to GST demands going back to 1 July 2017 on all intra-group corporate guarantees, without a clear valuation mechanism for the pre-Rule 28(2) period. As noted in analysis of the Lexology report on the subject, “the levy of GST prior to 26.10.2023 is bound to fail” on the ground that no tax is sustainable without a valuation mechanism — and courts may well agree with that position once these matters are finally heard on merits. [4]

The Export Dimension

A specific situation that merits attention is the case where an Indian company provides a corporate guarantee for a foreign subsidiary or related party. Section 7(1)(c) read with Schedule I would prima facie attract GST because the Indian guarantor and the foreign recipient are related persons. However, Section 2(6) of the Integrated Goods and Services Tax Act, 2017 [1] defines “export of services” as requiring, among other conditions, that payment be received in convertible foreign exchange. Where a corporate guarantee is given free of charge, this condition is not met — raising the question of whether the transaction can be treated as an export at all. Notification No. 12/2024-Central Tax has now clarified that Rule 28(2) does not apply where the recipient is outside India, resolving part of the ambiguity, though the export characterization question remains theoretically live. [3]

The Road Ahead

The GST treatment of corporate guarantees sits at the intersection of constitutional law, contract law, and tax policy. The statutory text of Section 7(1)(c) read with Schedule I Entry 2 makes a strong case for taxability of intra-group guarantees. CBIC has confirmed this through Circular 204 and backed it with Rule 28(2). But multiple High Courts have stayed these provisions at the interim stage, flagging concerns about whether the government can, by circular, foreclose the adjudication of a genuinely contested question, and whether Rule 28(2)’s deemed valuation of 1% is constitutionally proportionate.

Until the Supreme Court or a larger constitutional bench settles these questions, businesses that provide or receive corporate guarantees within their groups must navigate a landscape of significant uncertainty. The practical wisdom lies in proper documentation of all guarantee arrangements, obtaining advance rulings where possible, maintaining full ITC eligibility at the recipient entity to take advantage of the Circular 225 dispensation, and following the developing judicial outcomes closely.

References

[1] Central Goods and Services Tax Act, 2017 — Section 7(1)(c), Section 15, Schedule I Entry 2, Schedule III Entry 6 — https://www.indiacode.nic.in/bitstream/123456789/13154/1/the_central_goods_and_services_tax_act%2C_2017.pdf

[2] Commissioner of CGST and Central Excise v. M/s Edelweiss Financial Services Ltd., Civil Appeal Diary No. 5258 of 2023, Supreme Court, 17 March 2023 — https://www.business-standard.com/india-news/no-service-tax-on-corporate-guarantees-by-parent-cos-to-subsidiaries-sc-123040400741_1.html

[3] Taxmann Analysis — “Corporate Guarantee under GST: Ongoing Litigations, Amendments, Clarifications” — https://www.taxmann.com/post/blog/corporate-guarantees-under-gst/

[4] Lexology — “Taxability of Corporate Guarantee and Its Impact on Infra Sector” — https://www.lexology.com/library/detail.aspx?g=b053e087-79d2-401f-9040-f6f409392a77

[5] CBIC, Circular No. 204/16/2023-GST dated 27 October 2023 read with Notification No. 52/2023-Central Tax dated 26 October 2023 — https://gstcouncil.gov.in/node/4925

[6] Sterlite Power Transmission Limited v. Union of India, [2024] 160 taxmann.com 381 (Delhi HC) — https://www.taxmann.com/post/blog/corporate-guarantees-under-gst/

[7] Acme Cleantech Solutions (P.) Ltd. v. Union of India, 2024 SCC OnLine P&H 1010, Order dated 3 May 2024 (Punjab and Haryana High Court) — https://www.scconline.com/blog/post/2024/05/08/ph-hc-stays-effect-of-circular-related-to-corporate-guarantees-scctimes/

[8] India Corp Law — “GST’s New Frontier: Taxability of Corporate Guarantees” — https://indiacorplaw.in/2023/10/gsts-new-frontier-taxability-of-corporate-guarantees.html

[9] Law Asia — “Implications of GST on Issuance of Guarantee” — https://law.asia/gst-implications-on-guarantee-issuance/

Published and Authorized by Sneh Purohit