Corporate Guarantees Under GST: Navigating Taxability, Valuation, and Legal Precedents

The provision of a corporate guarantee, where one company pledges to cover the financial obligations of another (often a subsidiary or affiliate), is a common business practice. However, under India's Goods and Services Tax (GST) regime, this "costly promise" has evolved into a complex area of taxability, sparking significant litigation and regulatory clarification. Understanding the current landscape is crucial for businesses to ensure compliance and mitigate potential liabilities.

The Core of Taxability: When is a Guarantee a "Supply"?

For GST purposes, a corporate guarantee is treated as a supply of service. The pivotal legal trigger is found in Schedule I of the CGST Act, which deems certain activities as supplies even without consideration. Specifically, Paragraph 2 states that the supply of services between "related persons" in the course of business is taxable. Since a parent and subsidiary typically qualify as "related persons," a corporate guarantee provided without explicit fees falls squarely within this taxable ambit.

Valuation: A Rule in Transition

Determining the value of this service for tax purposes has been the central controversy. The governing rule is Valuation Rule 28.

• The Old Regime (Pre-October 2023): Valuation followed a hierarchy: first, the Open Market Value; if unavailable, the value of services of like kind and quality; and finally, a cost-based or residual valuation method. This led to uncertainty and disputes over what constitutes the "open market value" of an intra-group guarantee.

• The New Deemed Value (Post-26 October 2023): To curb litigation, the government inserted Rule 28(2) via Notification 52/2023. This rule now specifically prescribes that the value of a corporate guarantee provided to a related person in India shall be deemed to be 1% of the guarantee amount per annum, or the actual consideration, whichever is higher. This provides a clear, predictable benchmark.

A critical proviso accompanies both old and new rules: if the recipient is eligible for full Input Tax Credit (ITC), the value declared in the invoice is deemed to be the open market value. This means that in a full-ITC scenario, the tax impact is revenue-neutral for the group, as the credit offsets the liability.

Clarifications and the "Nil" Invoice Conundrum

Subsequent government circulars, particularly Circular No. 210/4/2024 and Circular No. 225/19/2024, have provided further clarity. They affirm the 1% valuation rule and address a key scenario: what if no invoice is raised for the guarantee?

The circulars clarify that if the supplier has not issued an invoice for the service, the value is to be treated as Nil, and consequently, no GST liability arises. This position aims to prevent tax demands on non-monetary, intra-group transactions where no invoice practice exists.

Judicial Endorsement and Quashing of Demands

Recent court rulings have fortified this interpretation, offering relief to taxpayers facing demands based on a 1% deemed value on all guarantees, irrespective of invoicing.

1. Metal One Corporation India Pvt Ltd Vs Union of India (Delhi High Court, 2024): The court held that for related-party transactions where no invoice is issued, the value is Nil, relying on Circular No. 210/4/2024. It emphasized that the department cannot ignore beneficial clarifications.

2. Thales India Private Limited Vs Additional Commissioner (Delhi High Court, 2025): Reiterating the Metal One stance, the court ruled that the absence of an invoice leads to a Nil value, which itself becomes the market value under Rule 28.

3. Amman Try Trading Company Pvt. Ltd. v. State Tax Officer (Madras High Court, 2025): The court quashed a GST demand, criticizing the revenue department for failing to consider the taxpayer's submissions based on the relevant CBIC circulars.

These judgments underscore that the tax authority must apply the clarified valuation mechanism consistently and cannot levy demands that contradict settled circulars, especially where no invoice is issued.

Mitigating Liability: The Path Forward for Businesses

Given this evolving framework, companies must adopt a strategic approach:

1. Documentation is Paramount: Assess existing corporate guarantees. If the intent is to treat the service as having Nil value, ensure a robust internal policy documents this position, aligning with the circulars.

2. Evaluate Invoicing Strategy: For groups where the recipient can claim full ITC, issuing a nominal invoice may be a prudent compliance step, as it crystallizes the transaction at a declared value and leverages the proviso to Rule 28.

3. Contesting Demands: If faced with a demand that ignores the clarifications and case laws, taxpayers should vigorously appeal. Grounds should include non-application of binding circulars (Circulars 210/2024 & 225/2024) and the precedents set by the Delhi and Madras High Courts.

4. Proactive Measures: For new guarantees or complex structures, seeking an Advance Ruling can provide certainty and prevent future disputes.

Conclusion

The journey of corporate guarantees under GST reflects a system maturing from ambiguity towards clarity. The insertion of Rule 28(2) and the subsequent clarificatory circulars, now bolstered by judicial approval, provide a clear roadmap. The law recognizes the economic reality of intra-group support while ensuring tax neutrality through the ITC mechanism. For businesses, the imperative is to align practices with this clarified position, ensuring that a corporate guarantee remains a tool for financial support, not a trigger for unexpected fiscal cost.