Overview
The term ‘corporate guarantee’ has not been defined under the Goods and Services Tax (“GST”) laws. Thereby, reference ought to be made to Section 126 of the Indian Contract Act, 1872, which defines a “contract of guarantee” as a contract to perform the promise, or discharge the liability, of a third person in case of his default.
The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.
Accordingly, a corporate guarantee can be understood as an assurance or undertaking by the guarantor to meet the obligations of the principal debtor in case the latter fails to discharge its liability to the creditor.
Nature of Corporate Guarantee: Supply of Service or not?
In the case of Commissioner of CGST and Central Excise v. M/s Edelweiss Financial Services Ltd., reported in 2023 (4) TMI 170, the Hon’ble Supreme Court dismissed the civil appeal and observed that the assessee had not received any consideration for providing a corporate guarantee to its group companies. Consequently, the Court held that, in the absence of consideration, the issuance of such a corporate guarantee would not be subject to service tax.
However, under the GST laws, a supply can happen even if made without a consideration. Schedule 1 of the CGST Act, 2017 specifies certain activities that qualify as supplies despite the absence of consideration.
Among these are transactions involving the supply of goods/services between related persons or between distinct persons, provided such transactions occur in the course or furtherance of business.
The term “related party” under Section 15 of the CGST Act includes:
- Officers or directors of one another’s businesses;
- Legally recognised partners in business;
- Employer and employee;
- Common control or ownership of 25% or more shares;
- Direct or indirect control of one over the other;
- Both controlled by a third person;
- Common control over a third person; or
- Members of the same family.
Thus, a corporate guarantee issued by a corporate entity to its related entity may be said to be a supply of service even if made without a consideration.
Taxability
“The value of supply of services…shall be deemed to be 1% 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.”
Thus, where:
- Corporate guarantee is issued without consideration → deemed value is 1% of the guaranteed amount p.a.
- Recipient is eligible for full ITC → invoice value shall be considered.
This could impose a significant burden on the guarantor.
Clarifications by the Board
Circular No. 204/16/2023-GST dated 27.10.2023
Two key aspects addressed:
- Personal Guarantee by Director: Treated as a supply of service even when provided without consideration. However, since companies cannot pay directors for personal guarantees (RBI Circular 2021-22/121), value may be treated as zero, hence no tax. If remuneration is paid, that value becomes taxable.
- Corporate Guarantee by Related Person or Holding Company: Treated as supply of service. Taxable value to be determined as per Rule 28(2).
Circular No. 225/19/2024-GST dated 11.07.2024
Clarifications:
- Corporate guarantee to banks/financial institutions was taxable even before 26.10.2023. Valuation to be done using Rule 28 as it existed then.
- After 26.10.2023 → Rule 28(2) applies.
- ITC is allowed irrespective of timing or amount of loan disbursement.
- Where the guarantee is for multiple years → value is 1% x number of years, or actual consideration, whichever is higher.
- Guarantees for less than a year → value calculated proportionately.
- Rule 28(2) does not apply where recipient is located outside India.
Liability under Reverse Charge Mechanism
- Where corporate guarantee is provided by a foreign/overseas entity for a related entity in India → GST payable under Reverse Charge Mechanism (RCM) by Indian entity.
- Personal guarantees by directors → GST payable under RCM per Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017.
Potential Grounds for Businesses to Challenge the Taxability of Corporate Guarantees
- Absence of “supply” under GST law
- Lack of consideration
- Arbitrary deemed valuation
These factors may be invoked to contest GST levies on corporate guarantees.
Absence of a Supply
The enforceability of a corporate guarantee remains uncertain. A corporate guarantee may or may not be enforced, depending on the circumstances. The guarantor’s obligation to pay only arises if the borrower defaults. Until such an event, no “actual” service is being performed or consumed.
The “service” is merely an assurance or a promise to act in a future, uncertain event. GST is typically levied on the supply of goods or services that are actively provided or consumed and does not extend to a passive, contingent obligation. As a result, there is ambiguity regarding whether the sole act of providing a guarantee qualifies as a ‘service’ and, consequently, whether it partakes the character of ‘supply’.
Contingent Contracts under Contract Act, 1872
Chapter III of the Contract Act, 1872 deals with ‘Contingent Contracts’. A “contingent contract” has been defined under Section 31 as a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. They cannot be enforced by law unless and until the uncertain event has happened. If the event becomes impossible, the contract becomes void.
In line with Section 33 of the Act, the contract between the Corporate Guarantor and the Bank becomes enforceable only when the borrower defaults. Otherwise, it is void. Thus, in the absence of a contractual relationship, the occurrence of a service being supplied is doubtful.
Relevant Case Law: Sterlite Power Transmission Limited
In Sterlite Power Transmission Limited & Ors. v. Union of India & Ors., 2024 (3) TMI 1311 – Delhi High Court, the Court issued notice on the challenge that a Corporate Guarantee to a subsidiary is not in the nature of supply of services taxable under Section 9 of the CGST Act.
It was contended that the provision of Corporate Guarantee is in the nature of a contingent contract, which is not enforceable until the guarantee is invoked by the entity to which it is provided. It was further submitted that the value of enforcement is not dependent on the value of the guarantee, and that only upon enforcement may the issue of service arise. Thus, fixing a value at 1% of the Corporate Guarantee provided would place an onerous burden on the entity issuing it.
Supply Under Section 7(1)(a) of CGST Act
For a transaction to be a “supply” under Section 7(1)(a), it must be made “for a consideration”. In many corporate guarantee scenarios, especially between parent and subsidiary companies, no explicit fee or commission is charged for providing the guarantee.
Since a corporate guarantee does not involve the transfer of goods or the performance of a service, unless explicitly provided for a fee, it does not meet the core criteria of “supply” under Section 7(1) of the CGST Act. Therefore, it is outside the scope of GST unless it is explicitly deemed a supply under specific provisions.
In Commissioner of CGST and Central Excise v. M/s Edelweiss Financial Services Ltd., 2023 (4) TMI 170, the Hon’ble Supreme Court held that the activity of providing a corporate guarantee without consideration does not qualify as a taxable service under the Finance Act, 1994.
Supply Between Guarantor and Banks/Financial Institutions
Section 127 of the Indian Contract Act, 1872 provides that anything done, or any promise made, for the benefit of the Principal Debtor, may be a sufficient consideration to the surety for giving the guarantee.
Accordingly, when a Guarantor issues a corporate guarantee in connection with the Bank’s sanctioning of a loan, the act of extending the loan to the Principal Debtor may be regarded as consideration provided by the Bank to the Guarantor. Consequently, it may be argued that since the contractual relationship exists between the Guarantor and the Bank, any supply of services, if established, would be between these two parties.
Herein, the primary beneficiary is the Bank which relies on the guarantee for security, not the Principal Debtor. Since the debtor does not directly receive a service, the transaction may not qualify as a supply from the guarantor to the debtor under GST.
Actionable Claim
Corporate Guarantees are actionable claims and therefore not liable to tax as per Schedule III of the CGST Act.
In Tvl. Kalyan Jewellers India Ltd. v. Union of India, 2024 (1) TMI 920 – Madras High Court, the Hon’ble Court clarified that “Gift Voucher/Card” constitutes a “debt instrument” which can be redeemed on a future date on its presentation towards ‘sale consideration’.
The Court held that “Gift voucher/Card” qualifies as an “actionable claim” under Section 3 of the Transfer Act, 1882 and as adopted under CGST Act. Tax was held to be payable only at the time of redemption of the “Gift Voucher/Card”.
The Hon’ble High Court observed that the term ‘debt’ refers to a sum of money that is either presently payable or will become payable in the future due to an existing obligation. Based on this understanding, it concluded that a Gift Voucher qualifies as a debt instrument.
By the same reasoning, a corporate guarantee can also be regarded as a debt instrument, as it acknowledges a debt and becomes enforceable at a future date upon the borrower’s default in fulfilling their obligations.
Arbitrariness
The deemed valuation of 1% applied when a corporate guarantee is provided to banks on behalf of the principal debtor appears to be arbitrary. Imposing GST based on this deemed value could be unduly harsh, especially in cases where the actual consideration received by the guarantor is lower than the deemed valuation.
In ACME Cleantech Solutions Pvt Ltd vs. Union of India & Ors. [TS-258-HC(P&H)-2024-GST], the Petitioner challenged the validity of Rule 28(2) of the CGST Rules, 2017, which lays down the scheme of valuation in case of supply of corporate guarantee provided between related persons, as 1% of the amount of such guarantee offered, or the actual consideration, whichever is higher. The Petitioner argued, inter alia, that the Rule is arbitrary, discriminatory, creates class legislation, and lacks a discerning principle for fixing the measure of tax at 1%, among other points. The Hon’ble Punjab and Haryana High Court granted a stay on the effect and operation of the Circular dated 27.10.2023.
In the case of M/s. Greenko Solar Power (Medak) Ltd. v. The Additional Commissioner & Ors., W.P. No. 35338 of 2024, a challenge was raised against the valuation under Rule 28(2), contending that it is discriminatory, arbitrary, unreasonable, and confiscatory—thus violating Article 14 in conjunction with Article 19(1)(g) of the Constitution. Additionally, a plea was made to declare the CBIC Circulars dated 27.10.2023 and 11.07.2024 as arbitrary and ultra vires. The Hon’ble Telangana High Court granted a stay on the effect and operation of the Circular dated 27.10.2023.
Litigation before the Hon’ble Courts
Sterlite Power Transmission Limited & Ors. vs. Union of India & Ors., 2024 (3) TMI 1311 – Delhi High Court: The Delhi High Court issued notice in a challenge where it was argued that a corporate guarantee to a subsidiary is not in the nature of a supply of services taxable under Section 9 of the CGST Act. It was contended that the provision of a corporate guarantee is in the nature of a contingent contract, which is not enforceable until the guarantee is invoked by the beneficiary entity. Further, the value of enforcement is not dependent on the value of the guarantee, and only upon enforcement may the issue of service arise, if at all. Thus, fixing a value at 1% of the corporate guarantee imposes an onerous burden on the provider.
Vedanta Limited vs. The Union of India & Ors., 2025 (1) TMI 590 – Bombay High Court: The Petitioner sought a declaration that providing a corporate guarantee to a subsidiary company does not constitute “supply” and/or “supply of service” taxable under Section 9 of the CGST Act. A challenge was made to Circular No. 204/16/2023-GST dated 27.10.2023, under which the tax is sought to be levied and collected, on grounds that it is unconstitutional, ultra vires, and violative of Articles 14, 19(1)(g), 246A, 265, and 300A of the Constitution of India.
The Hon’ble High Court observed that the issue is an important one and noted that the Delhi High Court had granted a stay, directing that no coercive action shall be taken against the Petitioner in case a final assessment order is passed or a demand is created. It also took note that the Telangana High Court and the Punjab and Haryana High Court have stayed the effect and operation of the Circular dated 27.10.2023.
Conclusion
The taxability of corporate guarantees has been challenged in multiple cases. While the Hon’ble Delhi High Court has issued notice, the Hon’ble Bombay High Court, Telangana High Court, and Punjab and Haryana High Court have stayed the effect and operation of the Circular dated 27.10.2023, which clarified that the activity of providing a corporate guarantee is a supply of service. Among other submissions, it has been argued by the Petitioners that no supply of service takes place until the borrower has defaulted and the corporate guarantee is enforced. Also, the issue of deemed valuation at 1% of the guaranteed amount—which often does not reflect actual commercial transactions—remains significant.
