Gujarat High Court on Friday barred the levy of Goods and Services Tax (GST) on corporate guarantees furnished before October 26, 2023 except when the guarantee continues beyond that date, which will attract tax from that day onwards.
In 2023, the Central Board of Indirect Taxes and Customs (CBIC) had said 18% GST will apply to corporate guarantees between parent and subsidiaries and other related parties either on the fee charged by the guarantor for that service, or 1% of the value of the guarantee, whichever is higher.
A corporate guarantee is an assurance by a party to a bank that it will repay the debt if the other party defaults.
The court also read down a section of the tax provision–“whichever is higher”—but retained the 1 per cent valuation mechanism.
The dispute arose after the government introduced Rule 28(2) from October 26, 2023. The rule prescribed a mandatory deemed value of 1 per cent of the amount guaranteed or the actual consideration, whichever was higher, for corporate guarantees between related parties. The words “per annum” were later inserted with effect from the same date.
Companies challenged the provision, arguing that guarantees provided by a holding company for its subsidiary without charging a fee or commission should not be treated as a taxable supply. They also opposed the attempt to apply the mandatory 1 per cent valuation retrospectively.
The directions of the Gujarat High Court are to be implemented within three months, the judgement said.
The court also quashed orders and show-cause notices issued under Section 74 of the CGST Act in the cases before it. Section 74 allows tax authorities to recover tax not paid or short-paid on account of fraud, wilful misstatement or suppression of facts.
The court said the disputes involved interpretation of the GST provisions and found no evidence of deliberate suppression or an intention to evade tax.
“This is a very significant development and would have repercussions on pending matters on similar issues across various other High Courts in India,” said Sudipta Bhattacharjee, Partner, Khaitan & Co.
GST on corporate guarantees has been heavily litigated, he added, noting that the court struck down the levy on guarantees furnished before October 26, 2023.
The court upheld the taxability of corporate guarantees even where no consideration is received.
It held that under the GST framework, certain transactions between related parties can qualify as a taxable supply even in the absence of consideration. This differs from the earlier service tax regime. The Supreme Court, in the Edelweiss Financial Services case, had held that service tax was not leviable on a corporate guarantee in the absence of consideration.
The court found the “whichever is higher” formula arbitrary.
It noted that actual charges or commission on corporate guarantees in the cases before it ranged from 0.25 per cent to 0.3 per cent. Forcing taxpayers to pay GST on a deemed value of 1 per cent even when actual consideration was lower, the court said, would impose an excessive burden. The expression violated Article 14 and Article 19(1)(g) of the Constitution. The court therefore read down the expression ‘whichever is higher’ while retaining the rest of rule.
Ritesh Kanodia, Partner, Aurtus Legal, said the court had upheld the legislature’s power to prescribe a valuation mechanism where the value of a supply cannot otherwise be determined, while drawing a clear distinction between prescribing a valuation methodology and imposing a tax burden retrospectively.
“The real controversy was never about the percentage prescribed under Rule 28(2), but whether a parent company’s decision to furnish a guarantee in support of its subsidiary constitutes a commercial service at all or is merely an incident of shareholding aimed at protecting and enhancing its investment,” Kanodia said.
The court noted that several guarantees had been issued between 2012 and 2023, including before the introduction of GST in July 2017. The Revenue had sought to apply the 1 per cent valuation retrospectively. This, the court held, imposed a new tax burden for a period when the specific valuation mechanism did not exist and was harsh and unfair to taxpayers.
