Supplies to Related Persons: Schedule I and Rule 28

Supplies to Related Persons explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

Two sections work together here and are often read apart. Schedule I paragraph 2 makes a supply between related persons or distinct persons taxable even without consideration. Rule 28 then tells you what value to put on it.

Read only the first, and every intra-group transaction looks like a valuation nightmare. Read the second, and most of them are not.

Schedule I paragraph 2 deems a supply of goods or services between related persons or between distinct persons under s.25, made in the course or furtherance of business, to be a supply even without consideration — with a carve-out for gifts up to ₹50,000 in a financial year by an employer to an employee. Rule 28 values such supplies at open market value, then like kind and quality, then Rule 30 or 31. But the second proviso to Rule 28(1) deems the value declared in the invoice to be the open market value where the recipient is eligible for full input tax credit — which resolves most intra-group cases.

Who is a related person

The Explanation to s.15 defines it. Persons are related if:

• they are officers or directors of one another's businesses;
• they are legally recognised partners;
• they are employer and employee;
• any person directly or indirectly owns, controls or holds 25% or more of the outstanding voting stock or shares of both;
• one directly or indirectly controls the other;
• both are directly or indirectly controlled by a third person;
• together they directly or indirectly control a third person;
• they are members of the same family.

And separately, persons who are associated in the business of one another in that one is the sole agent, sole distributor or sole concessionaire of the other are deemed to be related.

Distinct persons are different: s.25(4) makes separate registrations of the same person — whether in different States or multiple registrations in one State — distinct persons; s.25(5) does the same for an establishment in another State of a person registered in one.

Both are caught by Schedule I paragraph 2.

The Rule 28 ladder

Rule 28(1) applies where the supply is between related or distinct persons, other than through an agent. The value is:

(a) the open market value of the supply; failing which

(b) the value of supply of goods or services of like kind and quality; failing which

(c) the value determined by Rule 30 or Rule 31, in that order — Rule 30 being 110% of cost of production, acquisition or provision; Rule 31 being a residual reasonable-means valuation consistent with the principles of s.15.

Then the two provisos, which do the real work.

First proviso. Where the goods are intended for further supply as such by the recipient, the value may at the supplier's option be 90% of the price charged by the recipient to its unrelated customer. Useful for stock transfers into a distribution arm.

Second proviso. Where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value.

That second proviso is why most intra-group service cross-charges do not require a transfer-pricing exercise. If the receiving entity can take the whole credit, the tax is revenue-neutral, and the law says so.

Where the full-credit proviso does not save you

The recipient makes exempt supplies. Full credit is not available; Rule 42 apportionment applies. Open market value has to be established.

The recipient is a composition dealer. No credit at all.

The recipient has blocked credit on the specific supply. A cross-charge for motor vehicle running costs into an entity that cannot take that credit under s.17(5)(a) is not covered.

The supply is to a related person who is not registered. No credit, so no proviso.

Employer to employee. Employees are related persons by definition. Perquisites provided under the contract of employment are outside GST — Circular No. 172/04/2022-GST — but goods given as gifts above ₹50,000 per employee per financial year are a Schedule I supply. Employee recoveries and perquisites →

Rule 28(2): corporate guarantees

Inserted with effect from 26 October 2023 and amended since, Rule 28(2) prescribes a specific value for the supply of services by way of providing a corporate guarantee to a banking company or financial institution on behalf of a related person:

one per cent of the amount of the guarantee offered, per annum, or the actual consideration, whichever is higher.

The full-credit proviso applies here too — where the recipient of the guarantee service is eligible for full credit, the invoice value is taken as open market value. That has substantially defused what began as a large exposure for group holding structures.

Practice notes

• Identify every related and distinct person relationship first, including sole distributor arrangements that are easy to miss.
• For each flow, ask: is the recipient eligible for full credit? If yes, invoice at a reasonable figure and the value question closes.
• Where the answer is no, build the open market value file before the supply, not after a notice.
• For stock transfers to a distribution arm, consider the 90% option in the first proviso.
• Issue tax invoices for supplies without consideration — Schedule I supplies still require documentation and reporting.
• Remember the cross-charge vs ISD question is separate from valuation. Cross charge between distinct persons →

Key takeaways

• Schedule I paragraph 2: supplies between related or distinct persons are taxable without consideration.
• Employer-to-employee gifts up to ₹50,000 per financial year are excluded.
• Rule 28 ladder: open market value → like kind and quality → Rule 30 → Rule 31.
• Second proviso: where the recipient has full credit, the invoice value is the open market value.
• First proviso: goods for further supply as such may be valued at 90% of the recipient's onward price.
• Rule 28(2): corporate guarantees at 1% per annum of the guarantee amount, or actual consideration, whichever is higher.

Read next

• Schedule I: Supply Without Consideration
• Cross Charge Between Distinct Persons
• Valuation Rules 27 to 35 Explained
• GST on Employee Recoveries

Disclaimer: Positions stated as on 5 September 2026, based on ICAI Background Material on GST, Volume I (2026 edition). Verify the current text of Rule 28 before relying on the corporate guarantee valuation.