GST on Corporate Guarantees: Decoding Rule 28(2) & Valuation

In large corporate groups, it is common for a parent company (Holding Co) to stand as a guarantor for a loan taken by its subsidiary (Subsidiary Co). This is a "Corporate Guarantee." For decades, companies assumed that since no fee was charged between the parent and child, there was no GST.

The GST Council dismantled this assumption with a major amendment to Rule 28.

In 2026, even if a corporate guarantee is provided for free, the law "deems" that a taxable service has been provided. The government has fixed a mandatory valuation for this service, creating a significant tax liability for multi-national conglomerates.

This guide decodes Rule 28(2), the 1% valuation mandate, and the 2026 compliance landscape for corporate groups.

The "Deemed Service" Concept

Under GST, transactions between "Related Persons" are taxable even without consideration (Schedule I).

• Holding and Subsidiary are "Related Persons."
• The act of providing a guarantee is a "Supply of Service."
• Status: Taxable at 18% GST.

Mandatory Valuation: The 1% Rule

Previously, companies struggled to find the "Market Value" of a guarantee. To end litigation, the government introduced Rule 28(2):

The value of a corporate guarantee provided by a related person to a banking company or financial institution shall be:

• 1% of the amount of such guarantee offered.
• Measured on an annual basis.

Example: If a parent company provides a ₹100 Crore guarantee for its subsidiary’s bank loan, the "value of service" is ₹1 Crore (1%). Even if the parent company charges ₹0 to the subsidiary, it must pay 18% GST on that ₹1 Crore (i.e., ₹18 Lakhs per year).

The "One-Time" vs. "Annual" Debate

The 2026 clarification suggests that the 1% valuation is applicable periodically as long as the guarantee is live. If the guarantee is for 5 years, the 1% valuation (and the 18% GST) must be accounted for in each of those 5 years.

Personal Guarantees (Directors/Promoters)

A major relief was provided for personal guarantees.

• If a Managing Director or Promoter provides a personal guarantee to a bank for the company’s loan.
• The Rule: If the director does not charge any commission to the company, the value is treated as ZERO.
• The Catch: If the director is paid a commission or fee, that fee is taxable under Reverse Charge Mechanism (RCM).

Legal Reference

Relevant Authority: Rule 28(2) of the CGST Rules, 2017 (inserted via Notification No. 52/2023). Circular No. 204/16/2023-GST provides the detailed clarification on the non-taxability of personal guarantees.

Export of Guarantee Services

If an Indian parent company provides a guarantee for its foreign subsidiary (outside India).

• The Rule: This is generally treated as an Export of Service.
• Benefit: If all conditions for export are met (payment in forex, etc.), the supply is Zero-Rated. No 18% GST is payable, but the "1% valuation" must still be used to determine the turnover for LUT purposes.

Common Mistakes with Rule 28(2)

1. Wait and See Approach: Many companies haven't yet started paying GST on old existing guarantees. The GST department is using Data Analytics to cross-check "Contingent Liabilities" mentioned in the Balance Sheet against GST returns. Automated notices for the "1% Shortfall" are now common.
2. Ignoring the "Multi-year" Impact: Failing to account for the guarantee as a Continuous Supply of Service. If the guarantee is not cancelled, the 18% GST liability keeps accruing every year.
3. Drafting Weak Invoices: Since no money moves, parent companies often forget to issue a Tax Invoice for the "Deemed Service." Without an invoice, the subsidiary cannot claim the 18% GST as Input Tax Credit (ITC), leading to a real cost for the group.

Conclusion

The 1% corporate guarantee rule is a classic example of "Presumptive Taxation." For CFOs in 2026, the priority is to move from "Informal Support" to "Rigid Documentation." Every corporate guarantee must be backed by a board resolution, a tax invoice issued regularly, and a mechanism to ensure the subsidiary can successfully claim and utilize the ITC. By managing this "Circle of Tax," companies can avoid multi-crore penal interest during future audits.