Last reviewed: 10 September 2026. A Gujarat High Court ruling reported around 14 August 2026 has reopened the debate on GST for intra-group corporate guarantees, upholding Rule 28(2) of the CGST Rules as constitutionally valid but cutting back how far back the department can reach with demands. For Indian promoter groups, holding companies and treasury teams that routinely guarantee a subsidiary's bank facilities, this ruling changes the exposure calculus without closing the file — several valuation questions remain actively contested.
Why corporate guarantees became a GST flashpoint
A corporate guarantee is a common piece of group finance plumbing: a parent or holding company guarantees a bank loan or facility taken by its subsidiary, usually without charging a market fee, because the group treats the arrangement as internal support rather than a commercial service. Revenue's position, formalised through Rule 28(2) of the CGST Rules (inserted with effect from 26 October 2023) is that this is a "supply" between related persons and must be valued even when the guarantor charges nothing or charges below market rate. The rule deems the taxable value to be 1% per annum of the amount guaranteed, or the actual consideration charged, whichever is higher — a formula that overrides the normal "open market value" test that would otherwise apply under Rule 28(1) for related-party transactions.
CBIC first clarified that corporate guarantees between related persons are taxable supplies through Circular No. 204/16/2023-GST, and followed up with Circular No. 225/19/2024-GST to iron out valuation mechanics — including how the 1% figure is computed where a guarantee is issued for a period shorter than a year, or where multiple guarantors jointly guarantee the same facility. On the strength of these two circulars, field formations across India began issuing show-cause notices and demand orders computing GST (plus interest and, in several cases, penalty) at 1% p.a. on guarantees that had been running for years, in some cases reaching back to periods well before October 2023.
What the Gujarat High Court decided
The Gujarat High Court, in a ruling reported around mid-August 2026, was asked to strike down Rule 28(2) itself as ultra vires the valuation scheme of the CGST Act. The Court declined to do so — it upheld the rule's constitutional validity, confirming that the legislature and the rule-making authority are within their power to prescribe a deeming fiction for valuing a supply between related parties, even where that fiction departs from actual consideration. That part of the ruling is a setback for taxpayers who had hoped the entire framework would be read down.
Where the ruling helps taxpayers is on retrospective application. The Court restricted the department's ability to raise demands under Rule 28(2) for periods before the rule came into force, holding that a guarantee that was given, or continued to subsist, before 26 October 2023 cannot automatically be taxed under this deeming provision merely because it remained outstanding after that date. In effect, the valuation fiction operates prospectively from the rule's effective date; it is not a licence to tax years of guarantee cover that predates the rule. This is a meaningful, though not absolute, curb on the more aggressive demand orders issued over the past two years — and it is reasonably expected that the department may carry this point in appeal, so groups should treat it as the current legal position rather than a final word.
Where the dispute still lives — three open fronts
Even accepting Rule 28(2) as valid and prospective, three genuine grey areas continue to generate litigation and should not be assumed settled just because the constitutional challenge failed.
| Open issue | Revenue's view | Taxpayer's view |
|---|---|---|
| Guarantee given for no consideration, group policy shows no fee is ever charged | 1% p.a. deemed value applies regardless of actual practice — the rule is a fixed formula, not a rebuttable presumption | Where the group has never charged a guarantee fee and can evidence this as consistent treasury policy, some taxpayers argue a nil or minimal value should still be defensible under general valuation principles |
| Cross-border guarantees (Indian company guaranteeing a foreign subsidiary's borrowing) | May be treated as an "import of service" question in reverse, or raise place-of-supply and export-of-service characterisation issues distinct from a purely domestic guarantee | Taxpayers contend the domestic 1% deeming fiction was not designed for outbound guarantees and that ordinary place-of-supply rules should govern, not an automatic extension of Rule 28(2) |
| One-time vs continuing guarantee | 1% p.a. is charged for as long as the guarantee subsists, treated as a continuing supply year after year | Some taxpayers argue a guarantee issued as a one-time act (not renewed or actively managed) should attract valuation only once, not as a recurring annual charge |
None of these three points has been conclusively closed by the Gujarat High Court ruling — the ruling's core contribution is on validity and pre-Oct-2023 retrospectivity, not on these downstream valuation mechanics.
Worked example: computing the GST exposure
Consider a holding company, HoldCo, that guarantees a term loan of ₹50 crore taken by its wholly-owned subsidiary, SubCo, from a bank. The guarantee was issued on 1 April 2024 and remains outstanding through FY 2025-26. HoldCo does not charge SubCo any guarantee commission.
| Particulars | Amount |
|---|---|
| Guaranteed loan amount | ₹50,00,00,000 |
| Deemed value under Rule 28(2) — 1% p.a. | ₹50,00,000 per annum |
| Actual consideration charged by HoldCo | ₹Nil |
| Taxable value applied (higher of the two) | ₹50,00,000 per annum |
| GST payable (18%, IGST or CGST+SGST as applicable) per annum | ₹9,00,000 |
| Cumulative GST exposure for FY 2024-25 and FY 2025-26 (two years, post-Rule 28(2)) | ₹18,00,000, plus applicable interest if paid late |
Because the guarantee was issued after 26 October 2023, this liability falls squarely within the prospective operation of Rule 28(2) confirmed by the Gujarat High Court, and HoldCo should ordinarily self-assess and discharge it through its regular returns rather than wait for a notice. Had the same guarantee instead been issued in, say, 2019 and simply continued unchanged, the position on whether Rule 28(2) can be invoked for the pre-October-2023 period is the specific point the ruling makes harder for the department to sustain — though each fact pattern still needs to be checked against the guarantee's actual renewal or amendment history.
Common mistakes and red flags
- Assuming that because no fee is charged, no GST liability arises — Rule 28(2) explicitly overrides actual consideration with a deemed 1% p.a. floor for related-party guarantees.
- Treating all guarantees uniformly without checking the issue/renewal date against 26 October 2023 — this date is the fulcrum of the current relief.
- Not maintaining board resolutions, guarantee agreements and loan sanction letters that evidence when a guarantee was actually given or renewed — this documentation is exactly what a rectification or appeal will turn on.
- Ignoring cross-border guarantees on the assumption that Rule 28(2) is purely a domestic-related-party provision — the place-of-supply analysis for outbound guarantees needs separate attention.
- Paying GST once on a "continuing supply" basis without revisiting the annual computation each year, or conversely treating a continuing guarantee as a one-time event without documentary support for that position.
What business owners and CFOs should do now
Groups with intra-group guarantee structures should treat this as a compliance and documentation exercise, not merely a litigation-watching one. Practically: (1) map every corporate guarantee currently subsisting across the group — issuer, beneficiary subsidiary, amount, issue date, renewal history and any fee actually charged; (2) for every guarantee issued or renewed on or after 26 October 2023, self-assess GST at 1% p.a. (or the actual fee, if higher) and ensure it is going through returns — this is now settled law after the Gujarat High Court's validity finding; (3) for guarantees predating October 2023 that are the subject of a demand notice or order, evaluate the retrospectivity argument specifically, supported by evidence of when the guarantee was originally given; (4) keep board resolutions, intercompany agreements and loan documentation current and retrievable, since these are the primary evidence in both self-assessment and any dispute; and (5) treat the no-consideration and cross-border fact patterns as still open — get a position paper prepared rather than assuming either the department's or the taxpayer's reading automatically wins.
Frequently asked questions
Is GST payable on a corporate guarantee even if no fee is charged between group companies?
Yes, in principle. Rule 28(2) of the CGST Rules deems the taxable value of a related-party corporate guarantee at 1% per annum of the guaranteed amount, or the actual consideration charged, whichever is higher — so a nil-fee guarantee does not by itself avoid GST. Some taxpayers argue for a lower value based on established no-fee policy, but this remains a contested, fact-specific position rather than settled law.
Has Rule 28(2) been struck down by any court?
No. The Gujarat High Court, in a ruling reported around mid-August 2026, upheld the constitutional validity of Rule 28(2). It did not strike the rule down; it restricted how far back the department can apply it, particularly for guarantees given before the rule's effective date of 26 October 2023.
Can the department demand GST on a guarantee given before October 2023?
Per the Gujarat High Court ruling, demands under Rule 28(2) for periods before the rule's effective date face a significant hurdle, since the deeming fiction is not meant to apply retrospectively merely because an old guarantee continues to subsist. However, this is a fact-specific defence and the department may still pursue an appeal, so it should not be treated as a closed question.
What rate applies and how is the 1% computed for guarantees running less than a full year?
The base rate under Rule 28(2) is 1% per annum of the guaranteed amount. CBIC Circular No. 225/19/2024-GST provides mechanics for computing this where the guarantee period is shorter than a year or involves multiple guarantors, and these mechanics should be applied carefully rather than assumed.
Does Rule 28(2) apply to a guarantee an Indian company gives for a foreign subsidiary?
This is one of the genuinely unsettled areas. Cross-border guarantees raise additional place-of-supply and characterisation questions beyond the plain domestic-related-party fact pattern the rule was primarily framed for, and the point is still being litigated rather than settled.
What should a company do if it has already received a demand notice on a corporate guarantee?
Gather the guarantee agreement, board resolution and loan documentation to establish the exact issue and renewal dates, assess whether the demand period falls before or after 26 October 2023, and respond to the notice within the statutory timeline rather than ignoring it — professional review of the specific facts is strongly advisable given how fact-dependent this area currently is.
If your group has received a notice or demand order on intra-group corporate guarantees, or you want your guarantee structures reviewed before a notice arrives, our team can help you assess exposure and prepare a documented response.
GST Notice Handling GST Advisory Services Talk to usThis article is general information based on publicly reported developments as of the review date, not an opinion on any specific case; the legal position, including pending appeals, may change, and businesses should verify current status and consult a qualified professional before acting on their own facts.