Last reviewed: 25 September 2026. The Gujarat High Court decided Torrent Power Ltd v. Union of India (Special Civil Application No. 12175 of 2024) on 14 August 2026, and it is now the leading authority on GST for intra-group corporate guarantees. Rule 28(2) of the CGST Rules survives the constitutional challenge, but the Court read down the words "whichever is higher" and shut the department out of periods before 26 October 2023. Read alongside the 2024 amendment to Rule 28(2), which lets the invoice value govern where the recipient has full input tax credit, the practical exposure for most promoter groups is far smaller than the notices suggest.
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, is that this is a supply between related persons under Schedule I of the CGST Act and must be valued even when the guarantor charges nothing. A similar related-party question arises when a foreign parent seconds employees to its Indian subsidiary; see our note on GST on secondment of expat employees.
The rule has a short but important history, and most demand orders in circulation misstate one leg of it:
- Notification No. 52/2023-Central Tax dated 26 October 2023 inserted Rule 28(2), deeming the value of a related-party corporate guarantee at 1% of the amount guaranteed or the actual consideration, whichever is higher.
- Circular No. 204/16/2023-GST dated 27 October 2023 confirmed that such guarantees are taxable supplies, and said at that stage that the deemed value applied irrespective of whether the recipient had full input tax credit.
- Notification No. 12/2024-Central Tax dated 10 July 2024 substituted Rule 28(2) with retrospective effect from 26 October 2023. It inserted the words "per annum", confined the rule to a related recipient located in India, and added a proviso: where the recipient is eligible for full input tax credit, the value declared in the invoice is deemed to be the value of the supply. That proviso reversed the position taken in Circular 204.
- Circular No. 225/19/2024-GST dated 11 July 2024 set out the mechanics — proportionate valuation for part-year guarantees, proportionate liability among co-guarantors, valuation on the amount guaranteed rather than the amount disbursed, no application to a recipient located outside India, and payment of tax on the whole of a multi-year guarantee at the time the guarantee is issued.
On the strength of the original rule and Circular 204, field formations issued show-cause notices computing GST at 1% on guarantees that had been running for years, several of them reaching back well before October 2023 and invoking Section 74 (or section 74A for tax periods from FY 2024-25). Those notices are the ones the Gujarat High Court has now cut down.
What the Gujarat High Court decided
The petitioner asked the Court to strike down Rule 28(2) as ultra vires the valuation scheme of the CGST Act. The Court declined. It upheld the rule's constitutional validity against Articles 14, 19(1)(g) and 265, holding that the rule-making authority may prescribe a deeming fiction for valuing a supply between related persons, and confirmed that a corporate guarantee is a taxable supply under Schedule I even where no consideration passes. Taxpayers who hoped the framework would fall in its entirety did not get that relief.
The Court gave relief on three fronts instead.
It read down "whichever is higher". The Bench held that a legal fiction may assist valuation where real value is unavailable, but becomes arbitrary if it ignores real value despite its availability. The practical effect: where a genuine, ascertainable guarantee commission has been charged, GST is payable on that actual consideration, and the taxpayer cannot be forced up to the 1% figure. The 1% deemed value survives for the gratuitous guarantee, where there is no real value to look at.
It shut out the pre-26 October 2023 period. Applying Rule 28(2) to periods before the rule existed was held harsh and unfair, since groups had arranged their finances under the law as it then stood. This is worth stating precisely, because it is routinely overstated: the relief covers periods before 26 October 2023. A guarantee issued in 2019 that continues to subsist is still within Rule 28(2) for the period on and after 26 October 2023. What the department cannot do is reach backwards.
It tightened Section 74. The Court held that wilful suppression with intent to evade must be established, not asserted, before the extended limitation route is opened on a legacy guarantee. That is the answer to a large share of the notices now in circulation. For tax periods from FY 2024-25, demands run under section 74A (inserted by the Finance (No. 2) Act, 2024) instead of sections 73 and 74, and the same reasoning applies to its fraud-or-suppression limb.
Status update (25 September 2026): we have not traced a Special Leave Petition by the department against Torrent Power as of this review. The department may still take the matter to the Supreme Court, so treat this as the current position rather than the last word, and check the status before relying on it in a reply.
Where the dispute still lives
Two of the three questions that were genuinely open a year ago are now answered by the rule, the circular or the judgment. Only the first row below is still worth arguing about.
| Issue | Where it stands as at 25 September 2026 | What to do about it |
|---|---|---|
| Guarantee given for no consideration, where the recipient cannot take full ITC | Still live, but narrower than taxpayers hoped. Torrent Power held that absence of consideration does not take the guarantee out of GST, and the 1% deemed value applies precisely to the gratuitous case. The argument that a consistent no-fee treasury policy justifies a nil value has lost most of its force. | Do not build a position on no-fee policy alone. Test full-ITC eligibility first; if the recipient makes exempt or partly exempt supplies, budget for 1% p.a. |
| Cross-border guarantees (Indian company guaranteeing a foreign subsidiary's borrowing) | Settled against the department. Rule 28(2), as substituted with retrospective effect from 26 October 2023, applies to a related recipient located in India, and Circular 225/19/2024-GST states that the rule does not apply where the recipient is located outside India. | An outbound guarantee is an export-of-services question under the ordinary valuation and place-of-supply provisions. Resist any notice that simply extends the 1% fiction to it. The reverse case — foreign parent guaranteeing an Indian borrower — is an import of service under reverse charge, and Rule 28(2) does apply. |
| One-time vs continuing guarantee | Settled by CBIC's own circular. For a multi-year guarantee the value is 1% per annum multiplied by the number of years, and the whole of it is taxed at the time of issuance. A guarantee is not a continuous supply of services where no periodic payment is due; a fresh liability arises on renewal. | Pay at issuance for the full tenure. Spreading the tax year by year through returns leaves a shortfall from the date of issue and attracts interest under Section 50. |
An outbound guarantee to a foreign subsidiary also has an income-tax side: as an international transaction with an associated enterprise, it needs an arm’s-length guarantee fee under the transfer-pricing provisions (section 92 of the 1961 Act, and the corresponding provisions of the Income-tax Act, 2025 from tax year 2026-27), reported in the accountant’s report in Form 3CEB (section 92E of the 1961 Act; section 172 of the 2025 Act). For Indian subsidiaries on the receiving end of a foreign parent’s guarantee, our foreign subsidiary accounting and FEMA compliance service covers the reverse-charge entries and documentation.
Worked example: computing the GST exposure
HoldCo guarantees a term loan of ₹50 crore taken by its wholly-owned subsidiary, SubCo, from a bank. The guarantee is issued on 1 April 2024 for a tenure of two years, to 31 March 2026. HoldCo charges SubCo no guarantee commission. Work through it in the order the law now requires.
| Step | Position |
|---|---|
| Guaranteed amount and tenure | ₹50,00,00,000; 1 April 2024 to 31 March 2026 (two years) |
| Step 1 — Is SubCo eligible for full input tax credit? | If yes: the proviso to Rule 28(2) applies and the value declared in HoldCo's invoice is the value of the supply. A nil or nominal invoice ends the computation and no GST is payable. For an ordinary manufacturing or trading subsidiary with fully taxable output, this is the answer. |
| Step 2 — Only if SubCo cannot take full ITC (exempt or partly exempt output, composition, or a blocked-credit position) | Deemed value at 1% p.a. of the amount guaranteed: ₹50,00,000 × 2 years = ₹1,00,00,000 |
| GST at 18% (IGST or CGST+SGST as applicable) | ₹18,00,000 |
| When it is payable | In full at the time of issuance of the guarantee, in April 2024 — not ₹9,00,000 in each of FY 2024-25 and FY 2025-26. Circular No. 225/19/2024-GST is explicit on this; paying year by year leaves a shortfall carrying interest under Section 50. |
| If HoldCo had charged a real fee, say ₹30,00,000 p.a. | After Torrent Power, GST is payable on the ₹30,00,000 actually charged. The taxpayer is no longer pushed up to the ₹50,00,000 deemed figure by the words "whichever is higher". |
For a guarantee issued in April 2024, any demand is governed by section 74A; the Torrent Power reasoning on proving suppression applies equally to the extended-period limb of section 74A. Had the same guarantee been issued in 2019 and simply continued, the department could not tax the period up to 25 October 2023, but the period from 26 October 2023 onwards would still be assessed on the same two-step basis. Check the guarantee's renewal and amendment history, since a renewal on or after 26 October 2023 is a fresh taxable event.
Common mistakes and red flags
- Computing 1% before testing the proviso to Rule 28(2). Where the recipient is eligible for full input tax credit, the invoice value is the taxable value — this is the first question, not a fallback argument.
- Quoting Circular 204/16/2023-GST for the proposition that value applies irrespective of full ITC. Notification No. 12/2024-Central Tax overrode that with retrospective effect from 26 October 2023.
- Discharging tax on a multi-year guarantee year by year. The whole value is taxed at issuance; the balance carries interest from that date.
- Accepting a demand that extends Rule 28(2) to a guarantee given for a recipient located outside India. The rule does not reach it, and Circular 225/19/2024-GST says so.
- Reading Torrent Power as putting pre-2023 guarantees outside GST altogether. It protects periods before 26 October 2023, not the guarantee.
- Letting a Section 74 (or section 74A for tax periods from FY 2024-25) allegation stand unchallenged on a legacy guarantee where the group's treatment was disclosed and consistent.
- Not keeping board resolutions, guarantee agreements and sanction letters that fix when a guarantee was given, renewed or amended — this is the evidence a rectification or appeal turns on.
What business owners and CFOs should do now
Treat this as a computation and documentation exercise, in this order. First, map every subsisting guarantee across the group — guarantor, recipient, amount, issue date, tenure, renewal history and any fee actually charged. Second, for each one, record whether the recipient is eligible for full input tax credit; where it is, raise the invoice and rely on the proviso to Rule 28(2), and where it is not, compute 1% per annum over the tenure. Third, check the payment date against the date of issue, since tax on a multi-year guarantee falls due at issuance and any lag is carrying interest. Fourth, separate out the pre-26 October 2023 period on legacy guarantees and take the Torrent Power point on any demand that reaches into it, together with a Section 74 (or section 74A for tax periods from FY 2024-25) challenge where extended limitation has been invoked. Fifth, park outbound guarantees for related persons abroad outside this framework entirely and document them as export-of-services transactions. Valuation is one of several live GST dispute themes; for the classification side after the September 2025 rate changes, see our guide to GST rate classification disputes after GST 2.0.
Frequently asked questions
Is GST payable on a corporate guarantee even if no fee is charged between group companies?
A corporate guarantee between related persons is a supply under Schedule I of the CGST Act even where nothing is charged, and the Gujarat High Court confirmed this in Torrent Power Ltd v. Union of India on 14 August 2026. But run the proviso to Rule 28(2) first. Where the recipient is eligible for full input tax credit, the value declared in the invoice is deemed to be the value of the supply, so a nil or nominal invoice ends the enquiry. The 1% per annum deemed value bites where the recipient cannot take full credit and no fee is charged.
Has Rule 28(2) been struck down by any court?
No. In Torrent Power Ltd v. Union of India (Special Civil Application No. 12175 of 2024, decided 14 August 2026) the Gujarat High Court upheld the constitutional validity of Rule 28(2). It did two other things that matter: it read down the words "whichever is higher", so that a real and ascertainable guarantee commission can be taxed at that actual figure instead of the 1% deemed value, and it held that Rule 28(2) cannot be applied to periods before 26 October 2023.
Can the department demand GST on a guarantee given before October 2023?
Not for periods before 26 October 2023. The Gujarat High Court held that applying the Rule 28(2) fiction to those periods is harsh and unfair, and CBIC Circular No. 225/19/2024-GST itself says guarantees issued before that date are valued under the provisions as they then stood. The period on and after 26 October 2023 is a different matter: a guarantee issued in, say, 2019 that continues to subsist is within Rule 28(2) for the post-26 October 2023 period, so do not read the judgment as putting old guarantees outside GST altogether.
What rate applies and how is the 1% computed for guarantees running less than a full year?
The deemed value is 1% per annum of the amount guaranteed, and GST on that value is 18%. CBIC Circular No. 225/19/2024-GST sets the mechanics: a guarantee for six months is valued at 6/12 of 1%, a guarantee for five years is valued at five times 1% and the whole of that value is taxed at the time the guarantee is issued rather than year by year, co-guarantors are taxed proportionately to the amount each has guaranteed, and the base is the amount guaranteed and not the amount the bank actually disburses.
Does Rule 28(2) apply to a guarantee an Indian company gives for a foreign subsidiary?
No. As substituted by Notification No. 12/2024-Central Tax dated 10 July 2024, with retrospective effect from 26 October 2023, Rule 28(2) applies to a related recipient located in India, and CBIC Circular No. 225/19/2024-GST confirms that the rule does not apply where the recipient of the guarantee service is located outside India. An outbound guarantee is tested as an export of services under the ordinary valuation and place-of-supply provisions. The reverse case, where a foreign parent guarantees an Indian company's borrowing, is an import of service taxable under reverse charge and Rule 28(2) does apply to it.
What should a company do if it has already received a demand notice on a corporate guarantee?
Take the points in order. Check whether the recipient was eligible for full input tax credit, because the proviso to Rule 28(2) then makes the invoice value the taxable value. Check whether any part of the demand period falls before 26 October 2023, which the Gujarat High Court has held cannot be taxed under this rule. Where a real fee was charged, rely on the reading down of "whichever is higher". Where Section 74 (or section 74A for tax periods from FY 2024-25) has been invoked, ask the officer to establish fraud or wilful suppression rather than assert it. Then gather the guarantee agreement, board resolution and sanction letter to fix the issue and renewal dates, and reply within the statutory timeline.
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.