Corporate guarantees between group companies: the one percent rule

A treasury arrangement that generated a tax on a transaction with no cash flow at all.

The rule and its scope

The value is one percent per annum of the amount guaranteed, or the actual consideration, whichever is higher. It is a deemed value, not an arm's length enquiry.

It applies to a guarantee provided to a banking company or financial institution on behalf of a related person. A guarantee to a non financial counterparty, or a performance guarantee, is outside the sub rule and falls to be valued under the general rules.

Where the recipient of the guarantee service — the borrower group company — is eligible for full input tax credit, the position has been clarified in the taxpayer's favour, and the deemed value operates within that framework. Verify the current text and clarification.

The effective date matters. Guarantees issued before the rule, and continuing, raise the question whether the rule applies to the continuation or only to fresh issues and renewals.

The disputes

The pre rule period, where the department valued the guarantee on a notional arm's length basis or by reference to transfer pricing adjustments, and taxpayers contended there was no supply or no ascertainable value.

Whether the guarantee is a supply at all, where no consideration passes and the guarantee is given as a shareholder function. The Schedule I deeming provision for related persons is the department's answer.

The amount guaranteed, where a facility is sanctioned but partly drawn. The rule refers to the amount of the guarantee offered, which the department reads as the sanctioned amount.

Renewals and continuing guarantees, and whether each year is a fresh supply.

What to do

Inventory every guarantee: guarantor, beneficiary, lender, amount, date of issue, tenure, renewals, and consideration if any.

Record the borrower's credit eligibility for each, because it determines the exposure.

For the pre rule period, assemble the argument on absence of ascertainable value and on the shareholder function, and check whether the year is covered by the amnesty arithmetic.

Prospectively, decide whether to charge a guarantee commission commercially, since a charged consideration higher than one percent becomes the value in any event.

What to do on Monday

1. Build a guarantee inventory with amounts, dates, tenures and renewals.

2. Record the borrower's credit eligibility against each guarantee.

3. Assemble the pre rule period argument and run the amnesty arithmetic for covered years.

4. Decide the prospective commercial position on charging a guarantee commission.

Questions we are asked on this

Is a guarantee to a supplier or customer covered?

Rule 28(2) speaks of a guarantee to a banking company or financial institution. Other guarantees fall to be valued under the general rules.

Is the value one percent of the sanctioned or the drawn amount?

The rule refers to the amount of the guarantee offered, and the department reads it as the guaranteed amount. Document the sanction and the drawdown.

Does the recipient's full credit eligibility help?

Yes, and the interaction with the second proviso to Rule 28(1) has been clarified. Verify the current position for your period.

What about guarantees issued before the rule?

Contested. The arguments are absence of ascertainable value and the shareholder function, and the amnesty arithmetic may resolve the earlier years commercially.

Is a personal guarantee by a director taxable?

The clarifications have addressed personal guarantees by directors where no consideration is paid, and the position differs from corporate guarantees. Check the applicable circular.

In this cluster

• Valuation under Section 15: transaction value and its exceptions
• Rule 28 in practice: related party and distinct person supplies
• Northern Operating Systems: secondment, and the notice that follows every expatriate
• Cross charge of common costs between branches
• Mandatory Input Service Distributor: the compliance rebuild
• Post sale discounts: the agreement requirement and the credit note trail
• Free of cost supplies, warranty replacements and moulds
• Reimbursements and the pure agent exclusion under Rule 33
• Liquidated damages, penalties and notice pay recovery
• Vouchers and gift cards: the amended treatment

GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.