GST on Corporate Guarantees: Decoding the Recent Rulings and Valuation Rules#
The Core Dispute#
In the corporate world, it is standard practice for a parent (holding) company to provide a Corporate Guarantee to a bank on behalf of its subsidiary. This guarantee helps the subsidiary secure loans at lower interest rates. Typically, the holding company does not charge the subsidiary any fee or commission for providing this guarantee. The GST department recently stirred up a massive hornet's nest by asserting that providing a corporate guarantee is a "supply of service" between related parties. Under Schedule I of the CGST Act, supplies between related persons are subject to GST even if made without consideration (free of cost).
Introduction of Rule 28(2)#
To standardize how this "free" service should be valued for taxation, the government introduced Rule 28(2). This rule dictates that the value of supply of a corporate guarantee provided by a holding company to its subsidiary shall be deemed to be:- 1% of the amount of the guarantee offered, OR- The actual consideration charged, whichever is higher.
This means if a holding company provides a Rs. 100 Crore guarantee to a bank for its subsidiary, the GST department will assume the holding company provided a service worth Rs. 1 Crore, and will demand 18% GST (Rs. 18 Lakhs) on it, even if no money actually changed hands.
The Legal Pushback and High Court Rulings#
Corporate India heavily contested this rule, leading to a flood of writ petitions. The debate centers on two main arguments:
- Is it a Service? A corporate guarantee is fundamentally an actionable claim or a transaction in money, neither of which qualifies as a 'service' under GST. Furthermore, the holding company provides the guarantee to protect its own equity investment in the subsidiary, not to provide a distinct service to the subsidiary.2. Arbitrary Valuation: Applying a blanket 1% valuation is arbitrary and ignores the commercial realities and credit ratings of different subsidiaries.
Recent rulings from various High Courts, including the Bombay and Punjab & Haryana High Courts, have provided mixed relief, often granting stays on coercive recovery actions by the GST department until the Supreme Court can provide a final, binding constitutional interpretation.
Navigating the Compliance Maze#
While the legal battles rage on, companies must protect themselves against massive, unexpected tax demands:
- Cross-Charge with ITC: If the subsidiary is engaged in fully taxable business (not exempt supplies), the holding company can choose to pay the GST and issue a tax invoice. The subsidiary can then claim the full Input Tax Credit (ITC), making the transaction revenue-neutral (a pure cash flow exercise).
- Valuation Under Rule 28(1): For companies choosing to litigate, it is critical to rely on the second proviso to Rule 28(1), which states that if the recipient (subsidiary) is eligible for full ITC, the value declared in the invoice (even if it is Nil) shall be deemed to be the open market value.
Group CFOs must immediately map all outstanding corporate and bank guarantees across their entities and model the potential GST cash flow impact to avoid surprise notices.