GST on corporate guarantees meets the new FEMA Guarantees Regulations, 2026.

Two separate regimes govern the same corporate guarantee: GST taxes it as a deemed supply under Rule 28(2), while RBI's new Guarantees Regulations, 2026 decide whether a resident can give one at all. Here is which rule is which.

A parent company guaranteeing a subsidiary's bank loan, or an Indian entity standing surety for its overseas group company, sits at the intersection of two unrelated statutes that happen to look at the same transaction. GST law asks whether the guarantee is a taxable supply and, if so, what it is worth. FEMA asks whether a resident is even permitted to give that guarantee, to whom, and what has to be reported afterwards. Getting one right says nothing about the other — both need separate sign-off.

The GST side: Rule 28(2) and the 1% rule

Under CGST Rule 28(2), inserted with effect from 26 October 2023, a corporate guarantee given between related persons (typically a parent for a subsidiary, or between group companies) to a bank or financial institution on the recipient's behalf is a deemed taxable supply, valued at 1% of the guaranteed amount per annum, or the actual consideration charged, whichever is higher — even where no fee is actually charged between the related parties. CBIC Circular No. 204/16/2023 (27 October 2023) first confirmed that such guarantees are taxable even without consideration, and Circular No. 225/19/2024 (11 July 2024) clarified two further points: valuation is pegged to the amount guaranteed, not the amount of the underlying loan actually disbursed, and a guarantee issued or renewed before 26 October 2023 is valued under whatever rule applied at the time, not retrofitted onto Rule 28(2). A proviso also protects recipients eligible for full input tax credit: where that is the case, the value declared in the invoice is itself treated as the open market value, sidestepping the 1% computation. A 2026 Gujarat High Court ruling has since upheld Rule 28(2)'s validity for guarantees from 26 October 2023 onward, while holding that the 1% mechanism cannot be applied retroactively to guarantees issued before that date — worth checking if your group has a guarantee on the books predating the rule.

The FEMA side: the Guarantees Regulations, 2026

Separately, the RBI notified the Foreign Exchange Management (Guarantees) Regulations, 2026 (FEMA 8(R)/2026-RB, dated 6 January 2026), replacing the twenty-five-year-old FEMA (Guarantees) Regulations, 2000. The new Regulations move from a transaction-by-transaction permission model to a principle-based one: a person resident in India can now act as guarantor, surety or principal debtor for a non-resident's obligation — or obtain a guarantee as creditor from a non-resident — without case-by-case RBI approval, provided the underlying transaction itself is not prohibited and both parties are eligible to lend to and borrow from each other under India's cross-border borrowing and lending framework. Guarantees issued by authorised dealer banks that are fully cash-collateralised carry a specific carve-out from that lending-eligibility test. In exchange for the lighter permission regime, reporting has tightened: guarantees must now be reported quarterly on Form GRN, filed with the designated AD bank within 15 days of quarter-end, which the bank then reports to the RBI within 30 days — with a late-fee structure (a flat component plus one scaled to transaction value and delay) replacing the earlier, less codified compounding process for missed reporting.

Where the two regimes actually meet

A cross-border, related-party guarantee — an Indian parent guaranteeing its foreign subsidiary's loan, or vice versa — now has to clear both tests independently. The FEMA question is permission and reporting: is the underlying borrowing permitted, is the lending-eligibility condition met, and has Form GRN gone in on time. The GST question is valuation and tax: is this a related-party guarantee to a bank or financial institution, and if so, is 1% per annum (or actual consideration, whichever is higher) being invoiced and GST charged on it. Groups that have only ever tracked the FEMA reporting cycle sometimes miss that the same guarantee carries a GST valuation and invoicing obligation running on an entirely different clock — and groups focused only on GST sometimes assume RBI permission is automatic now, which is true only within the specific conditions the 2026 Regulations set out.

How Advisory Monks Consulting helps

We review intra-group and cross-border guarantee structures through both lenses at once — FEMA permission and GRN reporting through our Cross-Border Tax desk, and GST valuation and invoicing through our Global Accounting team — so a guarantee that clears one test doesn't quietly fail the other.

This note is general information, not individualised tax or legal advice — corporate guarantee structures should be reviewed against your specific facts before relying on any valuation or reporting position described here.

This note is general guidance, not tax or legal advice. Positions depend on your specific facts — speak with a partner before acting.