CBIC Circular No. 225/19/2024-GST, dated 11 July 2024, resolves eight disputes on GST valuation of intra-group corporate guarantees under Rule 28(2) of the CGST Rules, 2017. The core rule: value equals 1% per annum of the guaranteed amount (not the loan disbursed) or actual consideration, whichever is higher. Key carve-outs — full-ITC proviso removes the 1% floor for fully ITC-eligible recipients; overseas guarantor triggers reverse charge on the Indian recipient; and cross-border recipient scenarios are excluded from Rule 28(2) entirely.
Background: How Rule 28(2) Came Into Effect
Corporate guarantee provided by a holding company or related entity to a bank on behalf of a subsidiary or associate is a taxable supply of service under Section 7 of the CGST Act, 2017. Before October 2023, valuation was governed by Rule 28(1) — open market value — which created significant uncertainty and litigation across BFSI and corporate treasury functions.
The 53rd GST Council recommended a specific valuation rule. Notification No. 52/2023-Central Tax, dated 26 October 2023, inserted Rule 28(2) into the CGST Rules, setting the value at 1% per annum of the guaranteed amount or actual consideration, whichever is higher. CBIC simultaneously issued Circular 204/16/2023-GST with initial guidance.
Despite Circular 204, trade and industry submitted further representations on eight unresolved issues. The 53rd Council also recommended a retrospective amendment: Notification No. 12/2024-Central Tax, dated 10 July 2024, amended Rule 28(2) with effect from 26 October 2023 to insert the full-ITC proviso and the export carve-out. Circular 225/19/2024-GST was issued the following day to resolve all eight outstanding issues.
Eight Clarifications: What Circular 225 Decides
1. Pre-October 2023 guarantees: taxable, but valued under old Rule 28(1) Corporate guarantees between related persons were taxable even before 26 October 2023. Rule 28(2) changes the valuation method — not the taxability. Guarantees issued or renewed before that date are valued under Rule 28(1) (open market value). Guarantees issued or renewed on or after 26 October 2023 use the 1% per annum formula.
2. Valuation basis is the guaranteed amount, not loan disbursed The guarantor's risk (default exposure) is fixed at the time the guarantee is issued. The value of supply does not change if the loan is partly or fully undrawn. GST is computed on the full guaranteed amount from day one. ITC is available to the recipient irrespective of loan drawdown timing.
3. Loan takeover does not trigger fresh GST — unless a new guarantee is issued A bank taking over an existing loan is a mere assignment and does not constitute a new guarantee supply. No fresh GST arises unless the takeover is accompanied by issuance of a fresh corporate guarantee or renewal of the existing one.
4. Co-guarantors: each pays 1% proportionate to their share of the guarantee If Co-guarantor A covers Rs. 60 lakhs and Co-guarantor B covers Rs. 40 lakhs of a Rs. 1 crore guarantee, A pays GST on 1% of Rs. 60 lakhs and B on 1% of Rs. 40 lakhs. The guarantee deed must record each party's proportionate share.
5. Domestic guarantor: forward charge; overseas guarantor: reverse charge on Indian recipient Where both parties are in India, the guarantor issues a tax invoice under forward charge. Where the guarantor is a foreign or overseas entity and the recipient is in India, the Indian entity pays IGST under reverse charge mechanism and issues a self-invoice. Missing this RCM obligation is a common SCN risk for Indian subsidiaries of foreign MNCs.
6. Multi-year guarantee: 1% × number of years; sub-annual: proportionate A five-year guarantee for Rs. 10 crore has a taxable value of 5% × Rs. 10 crore = Rs. 50 lakhs (GST payable upfront at the time of issuance). A six-month guarantee: value = 0.5% × guaranteed amount. Annual renewals each trigger a fresh 1% valuation.
7. Full-ITC proviso: invoice value = deemed OMV for fully ITC-eligible recipients Notification 12/2024-Central Tax inserted a full-ITC proviso in Rule 28(2) retrospectively from 26 October 2023. Where the recipient can claim full ITC, the value declared on the invoice is deemed the value of supply — any invoice amount (including nominal consideration) is accepted. The 1% floor only applies where the recipient has restricted or no ITC.
8. Export carve-out: Rule 28(2) does not apply where recipient is outside India The retrospective amendment also excludes cross-border scenarios: Rule 28(2) does not apply where the recipient of the corporate guarantee service is located outside India. Such supplies may qualify as zero-rated export of services under Section 2(6) of the IGST Act, 2017.
Practitioner Implications
For group CFOs and BFSI legal heads: The full-ITC proviso (Issue 7) is the most commercially significant clarification. Fully ITC-eligible subsidiaries — manufacturing, IT, pure-services entities — face no mandatory 1% floor. The guarantor can invoice at any consideration, including nominal amounts. This reshapes the economic analysis of intra-group guarantee fee arrangements. Only group entities with partially-exempt activities (NBFCs, insurance companies, certain real estate developers) must apply the 1% floor.
For treasury teams managing multi-year guarantees: Upfront GST on multi-year guarantees creates a significant working capital consideration. A ten-year guarantee for Rs. 100 crore creates a GST liability of 10% × Rs. 100 crore = Rs. 10 crore at the time of issuance. Treasury models for intra-group guarantee fees must factor in this upfront GST cost. Annual renewal structures avoid the upfront lump sum but require strict calendar management.
For Indian subsidiaries of MNCs: The overseas parent guarantee triggering RCM on the Indian subsidiary is the highest-frequency SCN risk arising from this circular. Compliance teams must audit all existing overseas parent guarantees, quantify the retrospective RCM exposure (from 26 October 2023), issue self-invoices, and establish a recurring process for annual valuation and RCM filing.
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Full verbatim text of Circular 225/19/2024-GST, complete annotated cross-references to Rule 28(2) CGST Rules as amended, all 8 issue-wise clarifications with worked numerical examples, practitioner notes on retrospective exposure calculation, foreign guarantor RCM self-invoicing workflow, full-ITC proviso eligibility analysis, and co-guarantor documentation checklist — in Veritect Legal AI.
Frequently Asked Questions
Does Rule 28(2) apply to corporate guarantees issued before 26 October 2023?
No. Rule 28(2) of the CGST Rules, 2017 — inserted vide Notification 52/2023-Central Tax dated 26 October 2023 — governs the valuation of corporate guarantee supply, not its taxability. For guarantees issued or renewed before 26 October 2023, the earlier Rule 28(1) framework (open market value) applies. Guarantees issued or renewed on or after 26 October 2023 are valued under Rule 28(2) at 1% per annum of the guaranteed amount.
Is GST on corporate guarantee computed on the loan amount or the guarantee amount?
GST is computed on the guaranteed amount, not the loan amount actually disbursed. CBIC Circular 225/19/2024-GST clarifies that the guarantor's obligation — taking on the risk of default — arises at the time the guarantee is issued, regardless of how much of the loan is drawn down. Rule 28(2) CGST Rules values the supply at 1% per annum of the amount guaranteed or actual consideration, whichever is higher.
What if the loan is only partly disbursed — is GST still computed on the full guarantee?
Yes. Under Circular 225/19/2024-GST, the value of supply of the service of providing a corporate guarantee is based on the amount guaranteed, not on the amount of loan actually disbursed. The recipient of the service is also eligible to claim ITC under the CGST Act irrespective of whether the full loan amount has been disbursed.
How does co-guarantor valuation work under Rule 28(2)?
Where two or more related entities jointly provide a corporate guarantee, each co-guarantor pays GST proportionately on 1% of the amount guaranteed by them. For example, if Co-guarantor A is responsible for 60% of a Rs. 1 crore guarantee, A pays GST on 1% of Rs. 60 lakhs. Circular 225/19/2024-GST requires the guarantee deed to record each co-guarantor's proportionate share clearly to support the GST computation.
Can the recipient claim ITC on the GST paid on the corporate guarantee fee?
Yes, subject to the conditions under the CGST Act and Rules. Further, if the recipient has full ITC eligibility, the full-ITC proviso inserted in Rule 28(2) retrospectively with effect from 26 October 2023 (vide Notification 12/2024-Central Tax) applies: the value declared in the invoice is deemed the value of supply, meaning the 1% per annum floor does not apply and any invoice amount is accepted.
What if the guarantor is an overseas holding company?
If the guarantor is a foreign or overseas entity providing a guarantee for a related entity located in India, Circular 225/19/2024-GST clarifies that GST is payable under reverse charge mechanism (RCM) by the Indian recipient — i.e., the Indian subsidiary. The Indian entity must issue a self-invoice, pay IGST under RCM, and may then claim ITC subject to eligibility. This is a common SCN risk for Indian subsidiaries of MNCs.
When does a loan takeover trigger fresh GST on corporate guarantee?
A loan takeover by another bank — a mere assignment of the existing loan — does not by itself trigger fresh GST on the corporate guarantee. Circular 225/19/2024-GST clarifies that GST is triggered only if the takeover is accompanied by issuance of a fresh corporate guarantee or renewal of the existing guarantee.
Does the 1% Rule 28(2) formula apply to export of corporate guarantee services?
No. Rule 28(2) of the CGST Rules was retrospectively amended with effect from 26 October 2023 vide Notification 12/2024-Central Tax to exclude cross-border scenarios: where the recipient of the corporate guarantee service is located outside India, Rule 28(2) does not apply. Such supplies may qualify as export of services under Section 2(6) of the IGST Act, 2017 and may be zero-rated.
Sources
This explainer is based on Circular No. 225/19/2024-GST, issued by CBIC on 11 July 2024. CBIC Circular 225
- Notification No. 52/2023-Central Tax dated 26 October 2023 — insertion of Rule 28(2): https://cbic-gst.gov.in/CGST-act-schedule-and-rules.html
- Notification No. 12/2024-Central Tax dated 10 July 2024 — retrospective amendment: https://cbic-gst.gov.in/CGST-act-schedule-and-rules.html
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