TaxTMI 
TaxTMI 
08 Aug 2026 
From Part I to Part II - The Controversy Moves from Taxability to Valuation
Part I examined whether a corporate guarantee, particularly one provided by a holding company to its subsidiary without any fee or commission, constitutes a taxable supply under GST. While consideration was central under the service tax regime, GST materially changed the position by recognising specified supplies between related persons even without consideration under Schedule I. Commissioner of CGST & Central Excise Mumbai East Versus Edelweiss Financial Services Ltd - 2022 (2) TMI 1359 - CESTAT MUMBAI, subsequently affirmed in Commissioner of CGST And Central Excise Versus M/s Edelweiss Financial Services Ltd. - 2023 (4) TMI 170 - SC Order . and subsequent DLF Home Developers Ltd Versus Commissioner of Central Excise, Goods & Service Tax, Gurugram - 2026 (7) TMI 373 - CESTAT CHANDIGARH, decisions remain relevant in understanding this transition, though the statutory framework under GST is materially different.
Once such a corporate guarantee enters the GST framework, the next question is its taxable value. From 01.07.2017 to 25.10.2023, there was no special valuation provision for corporate guarantees and the general provisions of Rule 28 applied. From 26.10.2023, Rule 28(2) introduced a specific valuation mechanism, which was subsequently amended retrospectively and clarified by the CBIC. Corporate guarantee valuation must, therefore, be examined period-wise.
The First Phase - Valuation from 01.07.2017 to 25.10.2023
Before 26.10.2023, Rule 28 contained no specific valuation provision for corporate guarantees. Accordingly, where a guarantee between related persons was treated as a supply under Schedule I, its value was determined under the general Rule 28 framework-first by open market value, then by value of supplies of like kind and quality, and, where these were unavailable, under Rules 30 or 31. Significantly, where the recipient was eligible for full input tax credit, the value declared in the invoice was deemed to be the open market value.
Applying this framework to corporate guarantees was, however, difficult. An intra-group guarantee by a parent company is not necessarily comparable with a bank guarantee provided commercially for consideration. Therefore, mechanically adopting a bank guarantee commission as the open market value of a corporate guarantee could itself give rise to valuation disputes
Can a Notional Guarantee Commission Become the Taxable Value?
During the pre-26.10.2023 period, a bank guarantee commission could not automatically be treated as the open market value of a corporate guarantee. A bank provides guarantees commercially after considering factors such as credit risk, security, financial standing and tenure, whereas a holding company may provide a guarantee primarily to support its subsidiary and protect the wider economic interests of the group.
Valuation therefore remained uncertain because, although specified supplies between related persons could be taxable even without consideration, no specific percentage or formula existed for corporate guarantees. The subsequent insertion of Rule 28(2) sought to remove this uncertainty by prescribing a uniform valuation mechanism.
The Full Input Tax Credit Proviso - An Important Part of the Earlier Rule 28
The second proviso to the original Rule 28 provided an important relaxation where the recipient was eligible for full input tax credit: the value declared in the invoice was deemed to be the open market value. This simplified valuation in substantially revenue-neutral related-party transactions, since the GST paid by the supplier ordinarily became available as credit to the recipient.
This proviso is particularly relevant to corporate guarantees issued or renewed before 26.10.2023. Circular No. 225/19/2024-GST dated 11.07.2024 clarifies that such guarantees are to be valued under Rule 28 as applicable during the relevant period. The special one per cent valuation mechanism introduced from 26.10.2023 cannot, therefore, be applied to the earlier period.
A Special Valuation Rule for Corporate Guarantees from 26.10.2023
Notification No. 52/2023-Central Tax dated 26.10.2023 inserted Rule 28(2), introducing for the first time a specific valuation mechanism for corporate guarantees provided to banks or financial institutions on behalf of related persons. The value was prescribed at one per cent of the amount guaranteed or the actual consideration, whichever was higher, thereby bringing greater uniformity to an uncertain area of valuation.
Circular No. 204/16/2023-GST dated 27.10.2023 explained that the amendment was intended to address differing valuation practices. It initially clarified that Rule 28(2) would apply even where the recipient was eligible for full input tax credit, a position that was subsequently reconsidered and materially changed.
One Per Cent of What - And for What Period?
The original Rule 28(2) left uncertainty whether the one per cent benchmark applied only once or for every year of the guarantee. For example, if Aayra Ltd. guaranteed Rs. 100 crore for Harpreet Ltd. for five years, a one-time application would produce a value of Rs. 1 crore, whereas an annual application would have significantly different consequences.
Notification No. 12/2024-Central Tax dated 10.07.2024 resolved the issue by retrospectively amending Rule 28(2) from 26.10.2023 to prescribe valuation on a per annum basis. Circular No. 225/19/2024-GST further clarifies that the value is to be determined proportionately for the number of years or part thereof for which the guarantee is offered.
The Significance of the Words "Per Annum"
The retrospective insertion of "per annum" clarifies that valuation is linked to the period for which the guarantee remains operative and the guarantor continues to bear the financial exposure. Thus, a Rs. 100 crore guarantee for two years would ordinarily attract the one per cent benchmark for each year, with proportionate valuation for part of a year as clarified by Circular No. 225/19/2024-GST. The retrospective amendment from 26.10.2023 ensures uniform application of this principle from the inception of Rule 28(2).
Guarantee Amount, Not the Loan Actually Disbursed
Circular No. 225/19/2024-GST clarifies that valuation is based on the amount guaranteed and not the loan actually disbursed, since the guarantor assumes financial exposure for the entire guaranteed amount. Thus, where a guarantee of Rs. 100 crore is furnished but only Rs. 60 crore is actually drawn, valuation would still be linked to Rs. 100 crore and would not stand reduced merely because the entire loan facility has not been utilised
What Happens When the Guaranteed Amount Changes?
Circular No. 225/19/2024-GST recognises that the amount of a corporate guarantee may change during its tenure. In such cases, valuation must correspond to the amount actually guaranteed for the relevant period, taking into account any increase, reduction or renewal. Guarantee documents, amendments and renewal records therefore assume importance, since ignoring changes in the amount or tenure may result in incorrect application of the one per cent valuation benchmark.
Renewal of an Existing Corporate Guarantee
Circular No. 225/19/2024-GST clarifies that Rule 28(2) applies to corporate guarantees issued or renewed on or after 26.10.2023. A guarantee issued earlier does not attract the special valuation mechanism merely because it continues beyond that date; however, its renewal on or after 26.10.2023 would attract Rule 28(2). The dates of issuance and renewal are therefore crucial, and the one per cent per annum formula cannot be applied indiscriminately to earlier guarantees.
Full Input Tax Credit - From Controversy to Relief
Initially, Circular No. 204/16/2023-GST clarified that Rule 28(2) would apply even where the recipient was eligible for full input tax credit. This created an anomaly because related-party supplies under Rule 28(1) enjoyed the invoice-value deeming benefit in full-ITC cases, whereas corporate guarantees remained subject to compulsory deemed valuation despite being substantially revenue-neutral.
Notification No. 12/2024-Central Tax dated 10.07.2024 corrected this position retrospectively from 26.10.2023. As clarified by Circular No. 225/19/2024-GST, where the recipient is eligible for full ITC, the value declared in the invoice is deemed to be the value of the supply.
Why the Full-ITC Relaxation Is So Important
The amendment is particularly significant where both related entities are engaged in fully taxable businesses, since GST paid by the guarantor is ordinarily available as credit to the recipient, making the transaction substantially revenue-neutral. Therefore, in applying Rule 28(2), an important threshold question is whether the recipient is eligible for full input tax credit; if so, the invoice-value deeming provision can materially alter the valuation outcome.
Actual Consideration Higher Than the Statutory Benchmark
Rule 28(2) also ensures that the statutory benchmark cannot be used to suppress a higher actual consideration. The prescribed valuation is determined by reference to one per cent per annum of the amount guaranteed or the actual consideration, whichever is higher, subject to the full-ITC relaxation.
Suppose Anish Ltd. provides a corporate guarantee of Rs. 50 crore to a bank on behalf of its related company and charges Rs. 75 lakh for the year. One per cent of Rs. 50 crore is Rs. 50 lakh. Since the actual consideration of Rs. 75 lakh is higher, the actual consideration would ordinarily be relevant under the special rule.
The provision therefore serves as both a deemed valuation mechanism and a statutory floor where consideration is actually charged. It prevents a related-party arrangement from being valued below the prescribed benchmark merely by fixing a nominal guarantee commission, while the full-ITC proviso separately addresses situations where valuation disputes serve little revenue purpose.
Corporate Guarantee for a Related Person Located Outside India
The 2024 amendment excludes from Rule 28(2) corporate guarantee services where the recipient is located outside India. As clarified by Circular No. 225/19/2024-GST, the one per cent per annum mechanism therefore does not apply to such cross-border guarantees. However, this exclusion does not itself make the transaction exempt; it must independently satisfy the conditions for export of services under the IGST Act.
The Two Valuation Periods Must Not Be Mixed
Corporate guarantees must be valued on a period-wise basis. Guarantees issued or renewed before 26.10.2023 are governed by Rule 28 as applicable at that time, whereas those issued or renewed on or after that date attract Rule 28(2). The one per cent per annum benchmark, therefore, cannot be mechanically applied to earlier guarantees, particularly in proceedings covering multiple financial years.
Corporate Guarantee Valuation - Substance Must Accompany the Formula
Rule 28(2) has brought greater certainty, but corporate guarantee valuation is not merely an exercise of applying the one per cent benchmark. The date and period of the guarantee, amount guaranteed, actual consideration, availability of full ITC and location of the recipient may all affect the outcome. Each transaction must therefore be examined with reference to its documentation and, above all, the law applicable at the relevant time.
Concluding Remarks - From Uncertainty To A Defined Valuation Framework
The journey of corporate guarantees under GST shows how a relatively simple commercial arrangement can become complex when the law creates a taxable supply even without consideration. From 01.07.2017 to 25.10.2023, valuation had to be determined within the general framework of Rule 28, including the important relaxation available where the recipient was eligible for full input tax credit. The insertion of Rule 28(2) from 26.10.2023 replaced this open-ended approach with a specific benchmark for corporate guarantees.
Yet the original special rule itself required refinement. The retrospective amendments made in 2024 clarified the annual character of the one per cent benchmark, restored the benefit available in full-ITC situations, and excluded overseas recipients from the special valuation mechanism. Circular No. 225/19/2024-GST further addressed practical questions concerning old guarantees, renewals, loan disbursement, and the period of the guarantee.
The valuation of a corporate guarantee therefore ultimately depends not merely on how much has been guaranteed, but also on when the guarantee was issued or renewed, for how long it operates, whether consideration has actually been charged, and whether full ITC is available to the recipient. Once these questions are answered in their proper sequence, an area of GST law that initially appears complicated becomes considerably more structured and manageable.
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