No ‘guarantees’ in GST: The corporate guarantee conundrum

In commercial terms, a parent company typically extends guarantee to support the financing requirements of its subsidiaries, often without charging a separate fee/ commission, as part of the broader group financing arrangement.

Under the erstwhile service tax regime, the Supreme Court (SC) in Edelweiss Financial Services Ltd.1 supplied a clear anchor clarifying that without consideration, there was no taxable service. However, the statutory framework under GST changed the position by deeming related-party transactions as a ‘supply’ even without consideration2. The controversy, therefore, can no longer be viewed merely through the binary lens of whether a corporate guarantee would constitute a taxable supply. The divergent approaches by Gujarat High Court (HC) in Torrent Power Ltd.3 and Bombay HC in M/s. D.P. Jain & Co. Infrastructure Pvt. Ltd.4, have widened the debate considerably. The practical focus now extends across the entire lifecycle of the guarantee, from its legal form and commercial rationale to valuation, accounting recognition and periodic GST implications.

Competing approach to taxability

The Gujarat HC approached the controversy from the substantive architecture of GST. It held that a corporate guarantee creates an enforceable obligation undertaken by the parent company for the benefit of its subsidiary and, therefore, constitutes a supply between related parties even where no consideration is charged. At the same time, the court drew an important distinction between taxability and valuation. It recognised that before 26 October 2023, the statutory machinery for valuing such guarantees was absent. Consequently, while the transaction qualified as a supply, the levy itself could not operate for the earlier period.

In contrast, the Bombay HC adopted a materially different approach. Drawing substantially from Edelweiss, it placed greater weight on the absence of consideration and the commercial nature of intra-group financial support. On this premise, the HC categorised the transaction as a gratuitous intra-group support not as part of any regular business and accordingly, held that the transaction did not constitute a taxable supply.

The divergence, therefore, is foundational rather than merely computational as it concerns the existence and character of the supply itself, before one reaches the mechanics of valuation.

Answering the valuation question

The controversy becomes equally significant once valuation enters the picture.

Rule 28(2), introduced from 26 October 2023, prescribed a valuation benchmark of 1% of the guaranteed amount or the actual consideration, whichever is higher. While intended to provide certainty, it also departed from commercial reality.

The GST Council itself had acknowledged5 that an arm’s length guarantee-fee ranges between 0.5% to 3%. Yet, unlike the 1% safe-harbour mechanism6, which remains optional, Rule 28(2), effectively converted 1% into a mandatory floor through the expression ‘whichever is higher’.

The reading down of this expression therefore assumes significance particularly, where an actual guarantee commission is ascertainable and commercially supportable, the deeming fiction would not displace such price merely because it falls below 1%. For corporate groups, valuation, therefore, becomes an exercise in aligning the GST position with transfer-pricing analysis, treasury policy and inter-company documentation, while recognising that an arm’s-length price for income tax purposes would not dictate the value for GST purposes.

In practice, most intra-group guarantees are extended without any commission. For these gratuitous guarantees, the exposure is not uniform, it shifts depending on the period involved and, critically, on whether the recipient can avail full credit.

Point of tax paradox & legacy guarantee

Pertinently, although the obligation arises upon execution of the guarantee, the time of supply is linked to when the transaction is recorded in the books of accounts7. Additionally, the annual disclosure of the guarantee coupled with the outstanding debt amount is relied upon to support yearly GST consequence, even though the arrangement does not constitute a ‘continuous supply of services’. This leaves an apparent tension between a one-time creation of the obligation and recurring tax liability, which may remain open to appellate scrutiny.

Legacy guarantees present a related but distinct issue. A guarantee executed prior to 26 October 2023 is not subject to 1% standard rule for the earlier period. However, if it continues beyond that date, GST exposure would arise prospectively. The duration and continued operation of the guarantee therefore become relevant from a compliance perspective. Businesses should accordingly track the date of execution, any renewal or modification, the outstanding debt covered by the guarantee and its eventual release and align these details with the related-party disclosures, accounting records and GST position adopted for each financial year.

Beyond taxability: Limitation, penalties and refunds

The lifecycle implications of corporate guarantees do not end at taxability and valuation. They also extend to the manner in which disputes are enforced. Where the underlying taxability itself has remained subject to serious interpretational controversy, mere non-payment of tax cannot automatically be elevated into ‘suppression’. The higher threshold requires deliberate withholding of material information with an intent to evade tax, rather than a mere omission arising from a contested interpretation. This makes contemporaneous legal opinions, accounting disclosures and responses to departmental enquiries increasingly relevant evidence of bona fides.

The refund direction adds an immediate cash-flow dimension. Where the levy itself could not be sustained for want of the requisite valuation machinery, tax collected for such period would equally lack a valid legal basis.

Where the controversy may head next

Ultimately, the divergence between Torrent Power and D.P. Jain is likely to require authoritative resolution. The larger controversy is no longer confined to corporate guarantees. It raises fundamental questions as to where the charging provision ends and valuation begins, how far statutory fictions may displace commercial reality, how accounting recognition should influence the point of tax. Until those questions are settled, corporate guarantees will require attention across their entire lifecycle.

Shilpa Verma, Associate Director, Grant Thornton Bharat and Ajay Jha, Assistant Manager, Grant Thornton Bharat, have also contributed to this article.

This article first appeared in the Taxmann on 21 August 2026.

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