TaxTMI 
TaxTMI 
Corporate Guarantees Under GST - From Commercial Support To Taxability And Valuation Part I - Understanding the Transaction and Its Tax Foundations
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....orporate Guarantees Under GST - From Commercial Support To Taxability And Valuation Part I - Understanding the Transaction and Its Tax Foundations<br>By: - Raj Jaggi<br>Goods and Services Tax - GST<br>Dated:- 8-8-2026<br>The Corporate Guarantee Framework - Three Legal Dimensions Corporate guarantees have become an important area of indirect tax litigation because a transaction that begins as financial support within a corporate group can give rise to difficult questions of taxability and valuation. The issue is further complicated by changes in the legal position over time. A proper understanding of the subject therefore requires first examining the commercial nature of a corporate guarantee, followed by its treatment under the service tax regime and, thereafter, under GST. The discussion on corporate guarantees can be broadly divided into three legal dimensions. First, it is necessary to understand what a corporate guarantee means, how it differs from a bank guarantee or a personal guarantee, and why a holding company or another group entity may provide such a guarantee without charging any fee or commission. Second, the taxability of corporate guarantees under the service t....
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....ax regime requires examination, particularly in light of the judicial principles emerging from Edelweiss Financial Services Ltd. and the subsequent DLF decisions on the requirement of consideration. Third, the position under GST requires a separate and more detailed examination. Even within GST, two distinct periods have emerged. The first extends from 01.07.2017 to 25.10.2023, when corporate guarantees between related persons were governed by Section 7 read with Schedule I, Section 15, and the then- existing Rule 28 of the CGST Rules, 2017. The second begins on 26.10.2023, when Rule 28(2) introduced a special valuation mechanism for corporate guarantees, followed by retrospective amendments and detailed departmental clarifications. This period- wise approach is important because the legal principles applicable during one period cannot necessarily be applied to another. The commercial transaction may remain the same, but the statutory framework governing its taxability and valuation has changed. The discussion in this three- part series therefore begins with the commercial and jurisprudential foundations of corporate guarantees before moving, in Parts II and III, to the speci....
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....al valuation regime, practical issues, and recent judicial developments. Corporate Guarantee - Understanding the Transaction Before Examining the Tax Corporate groups rarely operate as isolated legal entities from a commercial perspective. A holding company may establish subsidiaries for different projects, geographical areas, or business activities. Although each company has its own legal identity, the parent company's financial strength often supports the borrowing capacity of its subsidiaries. Banks and financial institutions may therefore require the holding company or another financially stronger group entity to stand behind the borrowing obligations of the company seeking finance. One commonly used instrument for providing such support is a corporate guarantee. A corporate guarantee is essentially a promise made by one company, called the guarantor, to meet the financial obligations of another company, generally a subsidiary or another group entity, if that company fails to discharge those obligations. The primary responsibility for repayment remains with the borrowing company. The guarantor does not ordinarily make any payment merely by issuing the guarantee. It....
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.... assumes a financial obligation that may become enforceable if the borrower defaults in accordance with the terms of the guarantee. A typical corporate guarantee therefore involves three parties: the borrowing company seeking finance, the bank or financial institution providing the finance, and the corporate guarantor whose financial strength gives additional comfort to the lender. This three-party relationship assumes considerable significance under GST because, although the guarantee is furnished to the bank or financial institution, it is provided on behalf of the borrowing entity. Rule 28(2) of the CGST Rules specifically addresses this relationship. Why Corporate Groups Provide Guarantees Without Charging a Commission Corporate guarantees are common in holding-subsidiary structures. A newly incorporated subsidiary or a special purpose vehicle may have valuable business opportunities but may lack an independent financial track record strong enough to secure substantial banking facilities. Its holding company may have greater net worth, stronger creditworthiness and an established banking relationship. A corporate guarantee from the holding company may therefore enable ....
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....the subsidiary to obtain finance that might otherwise be unavailable or available only on more onerous terms. An important feature of many such arrangements is that the holding company does not charge a separate guarantee commission. The commercial rationale is clear. Supporting the subsidiary may advance the economic interests of the corporate group. Successful execution of the subsidiary's project may improve its profitability, enhance the value of the holding company's investment and strengthen the group's overall financial position. Therefore, the absence of a separately identifiable guarantee fee does not mean that the guarantee lacks commercial purpose or significance. This commercial reality, however, raises an important tax question. If the holding company charges nothing for providing the guarantee, can the transaction nevertheless be taxed? The answer has evolved with the development of indirect tax law. Under the service tax regime, consideration was fundamental to determining whether a taxable service existed. GST introduced a wider statutory framework under which specified transactions between related persons can constitute supplies even without consi....
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....deration. This difference lies at the heart of the corporate guarantee controversy. Corporate Guarantee, Bank Guarantee and Personal Guarantee - Similar Expressions, Different Relationships A corporate guarantee should first be distinguished from a bank guarantee. In a bank guarantee, the bank itself undertakes an obligation in favour of the beneficiary at the request of its customer and ordinarily charges a fee or commission for doing so. Providing guarantees is part of banks' regular commercial activities. A corporate guarantee, on the other hand, is generally furnished by a company to support the borrowing or other financial obligation of another corporate entity, frequently belonging to the same group. The Bombay High Court highlighted this commercial distinction in M/s. D.P. Jain & Co. Infrastructure Private Limited. Versus Union of India, Ministry of Finance Department of Revenue New Delhi, Senior Intelligence Officer/Assistant Commissioner Directorate General of GST Intelligence, Coimbatore, Joint Director/Additional Director Directorate General of GST Intelligence, Coimbatore, Additional/Joint Commissioner of CGST & Central Excise Nagpur-I, Assistant Commi....
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....ssioner of State Tax (Investigation) Mumbai, State of Maharashtra, Thr. Its Additional Chief Secretary (Finance) Mumbai. -2026 (5) TMI 500 - BOMBAY HIGH COURT. The Court explained that corporate guarantees are generally furnished to safeguard the financial health of associate enterprises and to provide them support. Unlike banks, which issue bank guarantees in the regular course of their banking business, a company furnishing an intra-group corporate guarantee may not be engaged in the regular business of providing guarantees. In the factual setting before it, the Court described the corporate guarantee as essentially an "in-house guarantee" that is not generally issued to customers. A corporate guarantee must also be distinguished from a personal guarantee furnished by a director, promoter or other individual. This distinction assumes special significance under GST, as CBIC Circular No. 204/16/2023-GST dated 27.10.2023 separately addresses personal guarantees furnished by directors and corporate guarantees furnished between related entities. Although both forms of guarantee provide financial comfort to the lender, their commercial character and GST valuation consequences are ma....
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....terially different. Related Persons - The Statutory Relationship Behind the GST Consequences The next step is to understand why the relationship between the guarantor and borrower assumes such importance. Section 15 of the CGST Act, 2017 deals with the valuation of taxable supplies, and the Explanation appended to the section identifies circumstances in which persons are deemed to be related. The statutory relationship extends beyond ordinary family or partnership relationships and covers specified forms of ownership, control and corporate association. A holding company and its subsidiary therefore cannot necessarily approach an intra-group transaction in the same manner as two completely independent entities dealing at arm's length. Once the parties fall within the statutory concept of related persons, special consequences may follow not only for valuation under Rule 28 but also for determining whether an activity can constitute supply, even where no consideration has been charged. Suppose Harpreet Ltd. is the holding company of Aayra Ltd. Aayra Ltd. approaches a bank for a substantial project loan. The bank sanctions the facility subject to Harpreet Ltd. furnishin....
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....g a corporate guarantee. Harpreet Ltd. provides the guarantee without charging Aayra Ltd. any guarantee commission. The absence of consideration is certainly an important commercial fact. Under GST, however, the enquiry does not end there because the transaction takes place between related persons. No Consideration, Yet a Supply - Understanding the Schedule I Fiction Section 7 of the CGST Act, 2017 provides the statutory foundation for determining what constitutes a supply. Ordinarily, the concept of supply involves consideration. However, Section 7 must be read with Schedule I, which identifies specified activities that are to be treated as supplies even when made without consideration. Paragraph 2 of Schedule I covers supplies of goods or services, or both, between related persons when made in the course or furtherance of business. This deeming provision marks an important departure from the ordinary commercial understanding that tax should necessarily follow the price actually charged. The legislature recognises that transactions between related parties may take place without charging the price that unrelated parties dealing at arm's length would ordinarily charge. ....
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....Accordingly, specified related-party transactions are brought within the scope of supply even in the absence of consideration. This statutory fiction assumes particular importance in the case of a corporate guarantee. A holding company may genuinely charge nothing to its subsidiary for furnishing the guarantee. Nevertheless, if the requirements of Schedule I are satisfied, the absence of consideration does not by itself take the transaction outside GST. Once the activity is treated as a supply, however, another question immediately arises: what value should be assigned to a supply for which the parties have agreed no consideration? It is here that the distinction between taxability and valuation becomes crucial. Taxability and Valuation - Two Questions That Must Be Kept Apart Corporate guarantee disputes often become difficult because two distinct questions are blended. The first concerns taxability: does the transaction constitute a supply liable to tax? The second concerns valuation: once a taxable supply exists, what amount should be adopted as its taxable value? These questions arise at different stages and should be examined separately. This distinction assumed par....
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....ticular significance under the service tax regime. Section 65B(44) of the Finance Act, 1994 broadly contemplated an activity carried out by one person for another for consideration. Consequently, where consideration itself was absent, the basic requirement for treating the activity as a taxable service could fail. A valuation provision could determine the value of an existing taxable service, but it could not ordinarily be used to create the consideration necessary to establish the taxable service itself. The decision of the CESTAT, Chandigarh, in DLF Home Developers Ltd Versus Commissioner of Central Excise, Goods & Service Tax, Gurugram - 2026 (7) TMI 373 - CESTAT CHANDIGARH, reinforces this distinction. Corporate guarantees had been issued on behalf of associated enterprises without any guarantee commission or other consideration. The Department sought to sustain the demand by attributing a notional commission to the guarantees. The Tribunal rejected the approach because consideration was an essential ingredient of the taxable service itself. An assumed value could not be used to manufacture the consideration required to establish taxability. The Service Tax Juri....
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....sprudence - No Tax on a Notional Guarantee Commission The service tax controversy received significant judicial attention in 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. The dispute concerned corporate guarantees furnished to group companies without consideration. The Tribunal held that consideration was essential for an activity to qualify as a taxable service under Section 65B(44) of the Finance Act, 1994. Non-monetary benefits, even if relevant for valuation, could not establish the existence of the taxable service itself. The Supreme Court declined to interfere with the decision. It noted that no consideration had been received for providing the corporate guarantees and that the Revenue had failed to demonstrate that issuing corporate guarantees to group companies without consideration constituted a taxable service. The decision therefore became an important authority for the proposition that, under the service tax framework, a notio....
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....nal guarantee commission could not substitute for the consideration required by the charging provisions. The same reasoning has since been followed in corporate guarantee disputes. In DLF Home Developers Ltd., the appellant produced a Chartered Accountant's certificate confirming that no consideration had been charged or received. The Tribunal held that the commercial benefit obtained by another group entity, or the possibility that the guarantee enabled it to obtain finance on better terms, could not, by itself, constitute consideration in the hands of the guarantor. The jurisprudential principle was therefore clear: valuation could measure a taxable service, but it could not create the taxable event where the statutory requirement of consideration itself was absent. From Service Tax to GST - Why the Legal Equation Changed The transition from service tax to GST materially altered the statutory framework. Under the earlier regime, the absence of consideration could prevent an activity from meeting the statutory definition of a service. Under GST, Schedule I expressly recognises specified supplies between related persons even when consideration is absent. The legal enqu....
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....iry under GST therefore cannot end merely because the corporate guarantee deed records that no commission is payable. This difference explains why service tax decisions cannot be mechanically transplanted into GST. The first question under GST is whether the corporate guarantee satisfies the requirements of Section 7 read with Schedule I. If it does, the absence of consideration does not necessarily prevent the existence of a supply. The enquiry thereafter moves to Section 15 and the applicable valuation rules for determining the amount on which tax is to be discharged. The controversy under GST therefore developed along a different path. Even where taxability was asserted on account of the related-person fiction in Schedule I, considerable uncertainty remained over the value to be assigned to a corporate guarantee furnished without consideration. The original Rule 28 contained a general valuation mechanism for supplies between related persons, but corporate guarantees posed particular difficulties in determining open market or comparable value. This valuation uncertainty ultimately led to the introduction of a special mechanism in Rule 28(2), with effect from 26.10.2023. ....
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....Concluding Remarks - From Taxability to the Question of Value Part I established that a corporate guarantee is essentially an instrument of financial support. Under the service tax regime, Edelweiss and the subsequent DLF decisions rejected taxation based on notional guarantee commission where no consideration was received. GST materially changed this position by recognising specified supplies between related persons even without consideration. The controversy therefore shifted from taxability to valuation, particularly for the period from 01.07.2017 to 25.10.2023, before the introduction of the special valuation mechanism under Rule 28(2) from 26.10.2023. Part II examines this transition, including the original Rule 28, the introduction and retrospective amendment of Rule 28(2), the one per cent per annum benchmark, and the relaxation where the recipient is eligible for full input tax credit. *** =============<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....