Published 26 October 2026
A holding company signs a guarantee so that its subsidiary can borrow from a bank. Nobody invoices anybody, and no money changes hands. Since 26 October 2023, GST has a specific answer for this case. The guarantee is a supply of services by the guarantor to the borrower, valued at one per cent a year of the amount guaranteed, or the actual consideration if higher. That figure gives way only where the borrower is entitled to full input tax credit, in which case the value declared on the invoice stands. Two circulars, issued nine months apart, fill in most of the practical questions: guarantees given before the rule, multi-year guarantees, co-guarantors, loan takeovers and foreign parents. A director’s personal guarantee is treated differently.
This guide sets out the rule and the clarifications as they stand on 23 October 2026, and then the invoice, returns and timing.
Why an unpaid guarantee is a supply
The Explanation to section 15 deems persons related where, among other cases, one “directly or indirectly controls the other”, both are controlled by a third person, or any person holds twenty-five per cent or more of the voting shares of both. A holding company and its subsidiary, and two subsidiaries of the same parent, are usually related on these tests.
Paragraph 2 of Schedule I, read with section 7(1)(c), treats a supply of goods or services “between related persons … when made in the course or furtherance of business” as a supply “even if made without consideration”. Circular No. 204/16/2023-GST of 27 October 2023 (item 2) applied this to guarantees. A corporate guarantee given by a company to a bank or financial institution for a related company is “a supply of service between related parties as per provisions of Schedule I of CGST Act, even when made without any consideration”. The same applies to a holding company’s guarantee for its subsidiary.
Circular No. 225/19/2024-GST of 11 July 2024 (item 1) added that the supply “was taxable even before the insertion of sub-rule (2)”. What the rule changed was only how the supply is valued.
The valuation rule: rule 28(2)
Notification No. 52/2023-Central Tax of 26 October 2023 renumbered rule 28 as sub-rule (1) and inserted sub-rule (2). Notification No. 12/2024-Central Tax of 10 July 2024 amended it with retrospective effect from 26 October 2023: it added “located in India” and “per annum”, and inserted a proviso. As amended, rule 28(2) reads:
"Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person located in India, 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 per cent of the amount of such guarantee offered per annum, or the actual consideration, whichever is higher.
Provided that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the value of said supply of services."
The elements are these.
- Related persons, recipient in India. The rule does not reach unrelated parties, and since the 2024 amendment it does not reach a recipient outside India. Circular No. 225/19/2024-GST (item 8) confirms that rule 28(2) “shall not apply to the export of the services of providing corporate guarantee between related persons”.
- To a bank or financial institution. A guarantee given to anyone else, such as a supplier, a landlord or a bond trustee, is not within sub-rule (2). Its value falls back on rule 28(1): open market value, then like-kind value, then rules 30 and 31.
- One per cent a year, or the actual consideration if higher. Where a commission is actually charged and it exceeds one per cent of the amount guaranteed, the commission is the value.
The full-credit exception: a proviso to rule 28(2), not rule 28(1)
The second proviso to rule 28(1) already said that “where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value”. As first inserted, rule 28(2) opened with “Notwithstanding anything contained in sub-rule (1)”, and Circular No. 204/16/2023-GST said the one per cent value applied “irrespective of whether full ITC is available to the recipient of services or not”. The exception therefore did not reach guarantees.
The 2024 amendment changed that by inserting a proviso to rule 28(2) itself, effective from 26 October 2023. Circular No. 225/19/2024-GST (item 7) withdrew the earlier position: “where full input tax credit is available to the recipient of services, the value declared in the invoice shall be deemed to be the value of supply of the said service”.
Two limits apply. First, the proviso turns on the recipient being “eligible for full input tax credit”. A borrower that makes exempt supplies, and so reverses part of its common credit under rules 42 and 43, is not eligible for full credit (Apportionment and Reversal of Credit). Second, the proviso speaks of “the value declared in the invoice”, so an invoice is still issued.
What the circulars settle
Circular No. 225/19/2024-GST answers eight questions. Six matter for most groups.
- Guarantees given before 26 October 2023. If the guarantee was “issued or renewed before 26th October 2023”, it is valued under rule 28 as it then stood. If it is “issued or renewed on or after 26th October 2023”, rule 28(2) applies (item 1).
- Amount guaranteed, not amount drawn. The value “will be calculated based on the amount guaranteed and will not be based on the amount of loan actually disbursed”. The borrower’s credit is available “irrespective of when the loan is actually disbursed” (item 2).
- Loan takeovers. A takeover of the loan by another bank has “no impact on GST, unless there is issuance of fresh corporate guarantee or there is a renewal” (item 3).
- Co-guarantors. Where several related entities guarantee jointly, each pays tax on one per cent of the amount it guarantees. In the circular’s example, two co-guarantors of Rs 1 crore in a 60:40 ratio pay on 0.6 per cent and 0.4 per cent of the total. Where the total actual consideration exceeds one per cent, the consideration is the value (item 4).
- Multi-year guarantees, paid up front. A guarantee for five years is valued at five per cent of the amount guaranteed (or the actual consideration if higher), and “GST would be payable on such amount at the time of issuance”. A guarantee for six months is valued at half of one per cent. A one-year guarantee renewed each year is taxed at issue and on every renewal (item 6).
- Who pays. Between domestic companies, the guarantor pays under forward charge and issues an invoice under section 31. Where the guarantor is a foreign related entity and the borrower is in India, the Indian borrower pays under reverse charge (item 5). That is an import of services from a related person, covered by paragraph 4 of Schedule I (GST on Import of Services).
Personal guarantees by directors
Circular No. 204/16/2023-GST (item 1) treats a director’s personal guarantee to a bank for the company’s borrowing as a supply between related persons, but at a different value. RBI’s directions bar banks from allowing a borrowing company to pay its directors any consideration for such guarantees. The circular reasons that, with no consideration permitted, “the open market value of the said transaction/ supply may be treated as zero”, and “no tax is payable”. Where a guarantor is paid, for instance a former director whose guarantee is retained after a change of management, the taxable value is “the remuneration/ consideration provided”. The circular states that rule 28(2) “shall not apply” to personal guarantees by directors. Services by directors generally are covered in Services by Directors.
What the guarantor needs before invoicing
| Item | Where it comes from |
|---|---|
| The guarantee deed: amount, beneficiary bank or institution, term, renewal dates | Legal records |
| Relationship between guarantor and borrower under the section 15 Explanation | Shareholding and control records |
| Any commission actually charged | Books, intra-group agreements |
| For co-guarantees, each guarantor’s share | Guarantee deed |
| Whether the borrower is eligible for full credit (no exempt supplies, no rule 42/43 reversal) | The borrower’s returns and confirmation |
| Date the guarantee was issued or renewed (before or after 26 October 2023) | Guarantee deed, bank correspondence |
Invoice, returns and timing
The invoice. The guarantor issues a tax invoice under section 31 with the particulars in rule 46. Rule 47 requires it within thirty days of the supply, or forty-five days where the supplier is a banking company, financial institution or NBFC. Under Circular No. 225/19/2024-GST, the supply for a multi-year guarantee is the issue of the guarantee, and the value for the whole term is charged at that point.
Time of supply. Under section 13(2), tax falls due on the date of the invoice, if it is issued within the rule 47 period. Otherwise it falls due on the date the service was provided. Payment, if there is any, can bring the date forward (Time of Supply).
GSTR-1. The guarantor reports the invoice in table 4A (B2B) of GSTR-1, from where it reaches the borrower’s GSTR-2B. Its HSN or SAC goes in table 12. GSTR-1 is due by the 11th of the following month for monthly filers, or the 13th after the quarter under QRMP (Filing GSTR-1).
GSTR-3B. The guarantor pays the tax through table 3.1(a), due on the 20th of the following month under rule 61, or the 22nd or 24th after the quarter for QRMP filers. The borrower takes credit in table 4(A)(5), subject to section 16. Where a foreign guarantor is involved, the borrower declares the reverse charge in table 3.1(d), pays it in cash and takes credit in table 4(A)(2) (Reverse Charge for Businesses). The portal steps are in Filing GSTR-3B and Paying the Tax.
Signing. Companies verify returns with a digital signature certificate under rule 26.
Interest, penalty and corrections
Tax not paid on a guarantee carries interest at 18 per cent a year under section 50(1) from the day after it was due. The tax and interest are recovered through the demand provisions (GST Notices: DRC-01A and DRC-01). Within a single group, the tax paid by the guarantor is usually available to the borrower as credit, but that does not remove the interest on the guarantor’s delay. A missed invoice is added in a later GSTR-1, and its tax paid in a later GSTR-3B. Corrections to a return are limited by section 39(9) to 30 November after the end of the financial year (Correcting Mistakes in Returns).
The sequence for a group
- List every guarantee given by one group entity for another, with the beneficiary, amount, term and issue or renewal date.
- Confirm the parties are related under the section 15 Explanation and that the borrower is in India.
- For guarantees to banks or financial institutions issued or renewed on or after 26 October 2023, compute one per cent a year of the amount guaranteed for the term, and compare it with any actual consideration.
- If the borrower is eligible for full input tax credit, the value on the invoice is the value (proviso to rule 28(2)).
- Value guarantees to other beneficiaries, and earlier guarantees, under rule 28(1).
- Issue the invoice at the issue or renewal of the guarantee, and report it in GSTR-1 and GSTR-3B. A foreign guarantor’s service is paid by the Indian borrower under reverse charge.
- Treat a director’s unpaid personal guarantee as nil-valued under Circular No. 204/16/2023-GST, and a paid one at the amount paid.
The next guide in this set covers Liquidated Damages, Notice Pay and Penalties.