Corporate Guarantee vs. Bank Guarantee in India: GST Implications, Legal Framework & Key Judgments — Everything You Need to Know

The taxation of corporate guarantees under GST has been one of the most contested issues in Indian indirect tax law. The Bombay High Court’s landmark ruling in May 2026 has now brought significant clarity. This article answers the five most important questions businesses, CFOs, and tax practitioners are asking- in plain language, backed by the law and the latest judicial reasoning.

1. What Is a Corporate Guarantee in India?

A corporate guarantee is a formal commitment by one company to honour the financial or contractual obligations of another company, typically a subsidiary or group entity, in the event of a default.

In legal terms, it is a “contract of guarantee” as defined under Section 126 of the Indian Contract Act, 1872: a contract to perform the promise, or discharge the liability, of a third party in case of that party’s default. Read alongside Section 2(11) of the Companies Act, 2013, a corporate guarantee is an affirmation made by a larger or parent company on behalf of a smaller or associated entity, assuring a lender that the loan will be repaid.

In practice: when a subsidiary company seeks a term loan from a bank, the lender often requires the parent or holding company to stand as guarantor. The parent then executes a corporate guarantee deed in favour of the bank. In the D P Jain case, the petitioner, a highway construction company, executed three such guarantees in favour of the State Bank of India and Bank of Maharashtra, backing loans worth hundreds of crores advanced to its subsidiary project companies.

Three defining features of a corporate guarantee:

• No fee or consideration: The guarantor company does not charge the borrower for standing as guarantor. The D P Jain guarantees each contained an explicit clause declaring that the guarantor had not received and would not receive any security, fee, commission, or consideration from the borrower.

• Contingent obligation: The guarantee only becomes enforceable if and when the borrower defaults. Until default occurs, the guarantor has no active financial exposure.

• An in-house instrument: Unlike a bank guarantee, a corporate guarantee is not issued in the open market, is not a standard commercial product with a quoted price, and is not part of the guarantor’s regular business activity.

  
  

2. What Is a Bank Guarantee in India?

A bank guarantee is a financial instrument issued by a bank on behalf of its customer, assuring a third-party beneficiary that the bank will honour a specified payment obligation if the customer fails to do so.

It is a standard banking product. Banks issue guarantees regularly- it is part of their core commercial activity and they charge a commission or fee for doing so. The Bombay High Court in D P Jain noted this distinction clearly: for banks, providing a guarantee is part of their regular course of business and they charge a rate on the higher side.

Key characteristics of a bank guarantee:

 

• Involves consideration: The applicant pays a fee or commission to the bank in exchange for the guarantee. This makes it a commercial transaction from the outset.

• Usually requires security: Banks typically require the applicant to provide collateral or margin money before issuing a guarantee.

• Fool-proof security instrument: Under banking law, failure to honour a guarantee is treated as a deficiency of service by the bank. The beneficiary has direct recourse against the bank.

• Issued to third parties generally: Unlike a corporate guarantee, which is an in-house arrangement within a corporate group, bank guarantees are issued to a wide range of customers and beneficiaries as a standard commercial offering.

3. What Is the Difference Between a Corporate Guarantee and a Bank Guarantee?

These two instruments are often confused, but they are fundamentally different in nature, purpose, and legal character. The Bombay High Court in D P Jain spelled out these distinctions clearly, and they matter enormously for GST treatment.

Feature	Corporate Guarantee	Bank Guarantee
Who issues it	A company, on behalf of a related/subsidiary entity	A bank, on behalf of its customer
To whom	To a bank or financial institution	To a third-party beneficiary
Consideration	Usually nil — no fee charged to the borrower	Fee/commission charged by bank to applicant
Security required	Issued without security	Usually requires collateral or margin
Nature of business	Not part of the guarantor's regular business	Core banking activity
Enforceability	Contingent — enforceable only on default	Direct and immediate recourse on demand
Who benefits	The borrower (subsidiary/associate) gains credit access	The beneficiary is protected against non-performance
Issued to	Specific lender for a specific loan	General customers in the open market

The most commercially significant difference is the absence of consideration in a corporate guarantee. This is not a technicality — it has direct legal consequences under GST, as the Supreme Court and the Bombay High Court have both confirmed.

4. What Are the GST Implications of a Corporate Guarantee in India?

This is where the law has evolved dramatically and where the D P Jain judgment delivers its most important holding.

The Background: What the Government Tried to Do

The Ministry of Finance, through Circular No. 204/16/2023 dated 27 October 2023, declared that providing a corporate guarantee would be treated as a taxable supply of service under the CGST Act, 2017 — even when made without any consideration. It further inserted Sub-Rule (2) in Rule 28 of the CGST Rules, 2017 (via Notification No. 52/2023-Central Tax), which deemed the value of such supply to be 1% per annum of the guaranteed amount, or the actual consideration, whichever is higher.

The government’s position was that, because the guarantor assists the borrower in availing credit, essentially facilitating access to a financial facility, there is an element of service involved, and the transaction should be taxable irrespective of whether consideration is received.

What the Law Actually Says

The Bombay High Court in D P Jain undertook a thorough analysis of the CGST Act, 2017 and found that the government’s position was legally untenable for corporate guarantees given without consideration.

• Section 7 of the CGST Act (definition of “supply”) requires that the activity be made for a consideration, except for specific activities listed in Schedule I. A corporate guarantee given without any fee or commission does not satisfy this requirement.

• Section 2(102) of the CGST Act (definition of “services”) covers anything other than goods, money, and securities. While a guarantee has a service-like element, the court held that merely having the character of a service is not sufficient — there must also be a flow of consideration.

• Schedule III of the CGST Act excludes “actionable claims” from the definition of both goods and services. The court noted that a corporate guarantee could fall within the realm of an actionable claim — a contingent claim enforceable only on default — which is expressly outside the GST net.

What the Supreme Court Has Said

The Bombay High Court relied on the Supreme Court’s ruling in Commissioner of CGST & Central Excise vs. Edelweiss Financial Services Ltd. (MANU/SC/0648/2023), which held that issuance of a corporate guarantee to group companies without consideration does not fall within the ambit of taxable service. The Supreme Court confirmed that for an activity to be taxable, it must not only involve a provider but also a flow of consideration.

The D P Jain Ruling: Key GST Outcomes 

• Corporate guarantees given without consideration are not taxable under GST: The court found that all three corporate guarantees executed by the petitioner contained explicit clauses confirming no fee, commission, or consideration was received or would be received. In the absence of consideration, the transaction did not constitute a supply of service under Section 7 of the CGST Act, and GST was not leviable.

• The show cause notice and summons were quashed: The court quashed Show Cause Notice No. 02/2025-GST dated 28 January 2025 and the summons issued by DGGI, Coimbatore, setting aside all proceedings initiated against D P Jain for non-payment of GST on the corporate guarantees.

• The constitutional challenge to Rule 28(2) was rejected: While the court gave relief on the merits, it declined to declare Rule 28(2) as ultra vires. The court applied settled constitutional principles — there is a strong presumption in favour of the validity of a fiscal statute, and courts defer to legislative judgment on economic matters.

• Pre-amendment guarantees are governed by the old rules: All three guarantees were executed before 26 October 2023 (the effective date of the Rule 28(2) amendment). The government’s own notification clarified that guarantees issued before that date are to be valued under Rule 28 as it existed at the time — under which, with no consideration, the transaction value is nil.

Practical Implications for Businesses

Key Takeaway: If your company has given a corporate guarantee to a bank for a subsidiary’s loan, and your guarantee deed explicitly states that no consideration has been received or will be received, you have a strong legal position, backed by the Supreme Court and now the Bombay High Court, that GST is not leviable on that guarantee.

• If your corporate guarantees were executed before 26 October 2023, the Rule 28(2) amendment does not apply to them.

• If you receive a show cause notice or summons from DGGI or any GST authority demanding tax on such guarantees, the D P Jain judgment and the Edelweiss Supreme Court ruling provide solid grounds to challenge those proceedings.

• Going forward, for guarantees issued on or after 26 October 2023, Rule 28(2) notionally deems the value at 1% per annum — but the underlying question of whether a no-consideration guarantee can be taxed at all remains a live legal issue being litigated across multiple High Courts.

5. What Are the GST Implications of a Bank Guarantee in India?

A bank guarantee sits in an entirely different legal position from a corporate guarantee under GST, and the analysis is more straightforward.

• Bank guarantees are a taxable supply of service under GST. When a bank issues a guarantee on behalf of its customer, it charges a commission or fee. That fee is the consideration for the service rendered. All the ingredients of a taxable supply under Section 7 of the CGST Act are satisfied. there is a supplier (the bank), a recipient (the bank’s customer), a service (the guarantee), and consideration (the commission).

• The applicable GST rate is 18%. Bank guarantee commissions fall under the broader category of financial and banking services, which attract GST at 18% (9% CGST + 9% SGST, or 18% IGST for inter-state transactions).

• Input tax credit is available to businesses that receive bank guarantees for business purposes. The GST paid on bank guarantee commissions can be claimed as ITC, subject to the standard conditions under Section 16 of the CGST Act, provided the guarantee is used in the course or furtherance of business.

• The transaction value is clear and determinable. Unlike a corporate guarantee — where the absence of consideration creates valuation problems — a bank guarantee has a readily ascertainable transaction value: the commission or fee charged by the bank. There is no need to resort to Rule 28 or Rule 31 for valuation purposes.

This is why the Bombay High Court in D P Jain explicitly noted the distinction: bank guarantees are issued by banks as part of their regular course of business, for a fee, to customers generally. Corporate guarantees are in-house instruments, typically without consideration, issued within a corporate group for a limited purpose. The GST law and its interpretation by the Supreme Court and High Courts treat these two instruments very differently, and rightly so.

Key Takeaways

The D P Jain judgment from the Bombay High Court (Nagpur Bench), pronounced on 6 May 2026, is a significant addition to the growing body of case law on GST and corporate guarantees. Read alongside the Supreme Court’s ruling in Edelweiss, it establishes a clear principle: a corporate guarantee given without consideration is not a taxable supply of service under the CGST Act, 2017, and proceedings initiated on that basis are liable to be quashed.

• Businesses facing GST demands on pre-October 2023 corporate guarantees should take note of this judgment immediately.

• Review your guarantee deeds for the no-consideration clause and use this ruling to challenge any pending show cause notices or assessments.

• For bank guarantees, the position remains unchanged, they are taxable at 18% GST, with ITC available to eligible recipients.

Disclaimer

The note is prepared for knowledge dissemination and does not constitute legal, financial or commercial advice. AK & Partners or its associates are not responsible for any action taken based on its contents. © AK & Partners.

For further queries or details, you may contact:

Ms. Kritika Krishnamurthy

Founding Partner

AK & Partners

info@akandpartners.in