Gujarat High Court Upholds GST on Corporate Guarantees but Restricts Valuation and Retrospective Application

Summary

The Gujarat High Court has held that a corporate guarantee provided by a holding company for a related subsidiary can constitute a taxable supply of services under India’s GST rules, even where no separate consideration is charged.
The Court read down the “whichever is higher” wording in Rule 28(2), allowing actual consideration to be used where it is identifiable rather than automatically imposing the higher one-percent deemed value.
Rule 28(2) cannot be applied to levy GST for periods before 26 October 2023, although GST consequences may arise from that date for guarantees that continue in force.

Extended article

The Gujarat High Court has issued an important judgment on the GST treatment of corporate guarantees provided between related parties.

The Court considered whether a guarantee issued by a holding company to a bank or financial institution for the benefit of a subsidiary constitutes a taxable transaction, and whether the prescribed valuation mechanism is legally valid.

The Court held that a corporate guarantee between related persons can constitute a taxable supply of services under the Central Goods and Services Tax Act. Unlike the previous service-tax regime, the GST legislation contains provisions under which specified supplies between related persons may be taxable even in the absence of consideration. [alvarezandmarsal.com], [cfo.econom…atimes.com]

Rule 28(2) of the Central Goods and Services Tax Rules was introduced with effect from 26 October 2023. It prescribed a value based on one percent of the guaranteed amount per annum or the actual consideration, whichever was higher.

The Court upheld the rule in principle but read down the expression “whichever is higher.” According to the available analyses:

where actual and ascertainable consideration is charged, that consideration may be used for valuation;
where the guarantee is gratuitous or its value cannot otherwise be determined, the statutory deemed valuation may apply; and
valuation should not automatically default to the higher amount merely because the actual consideration is below one percent. [taxguru.in], [alvarezandmarsal.com], [cfo.econom…atimes.com]

The Court also rejected the retrospective application of Rule 28(2). The one-percent valuation mechanism cannot be used to levy GST for a period before 26 October 2023. However, where a guarantee issued earlier remains in force beyond that date, GST implications may arise from 26 October 2023 onward. [thehindubu…ssline.com], [alvarezandmarsal.com]

The judgment also addressed the valuation base. The analysis reports that the Court favoured the subsisting guarantee balance disclosed annually rather than automatically using the original sanctioned amount throughout the entire life of the arrangement. [taxguru.in]

The decision provides relief on valuation and retrospectivity but does not remove corporate guarantees from GST altogether. Indian corporate groups should therefore identify guarantees between related parties, determine whether any consideration is charged, review the balance remaining in force after 26 October 2023 and assess whether previous GST positions require reconsideration.

The judgment is particularly relevant because other courts have considered related questions concerning guarantees issued without consideration. Businesses should therefore monitor whether the ruling is appealed and whether the Central Board of Indirect Taxes and Customs updates its circulars or administrative position.

External sources