Summary: The Gujarat High Court’s ruling on corporate guarantees is not merely about whether GST is payable. It is about the limits of statutory fiction, the sanctity of commercial reality and the constitutional discipline that must govern taxation.
In corporate finance, few instruments are as deceptively simple as a corporate guarantee. It may begin with little more than a parent company’s assurance to a lender: extend credit to the subsidiary, and should the subsidiary falter, the parent will stand behind its obligations. No fee may be charged, no money may change hands, and the guarantee may never even be called upon. Yet, under India’s GST regime, that seemingly costless assurance may itself acquire a tax value. The controversy, therefore, goes beyond the narrow question of whether a corporate guarantee constitutes a “service”. The more fundamental question is: even if the parties haven’t attached a price to a promise, can the tax law assign one and, in doing so, transform a valuation fiction into a fiscal charge? The Gujarat High Court’s (“HC”) decision in Torrent Power Ltd. v. Union of India[1] highlights the conflict between commercial reality and statutory fiction.
The HC decision
A corporate guarantee between related entities can constitute a “supply” under GST even if the subsidiary pays no consideration to its holding company. This follows from the peculiar architecture of GST: specified transactions between related persons may constitute supplies, notwithstanding the absence of consideration. That proposition distinguishes GST from the earlier service-tax regime. In Edelweiss Financial Services[2], the Supreme Court had held, under the Finance Act, 1994, that consideration was integral to the statutory concept of service. The Gujarat High Court considered that reasoning incapable of being mechanically transplanted into GST, where Schedule I expressly recognises certain related-party transactions as supplies even without consideration.
The HC has treated corporate guarantee not as an isolated promise made to a bank, but as part of an interconnected commercial arrangement whose benefits flow to the subsidiary.
Rule 28(2) of CGST Rules, 2017, introduced with effect from October 26, 2023, prescribed a deemed value for specified corporate guarantees furnished to banking companies and financial institutions: 1% per annum of the amount guaranteed or the actual consideration, whichever was higher. The HC did not strike down the rule. Instead, it did something more nuanced: it read down the expression “whichever is higher”. The distinction is fundamental.
The HC’s answer is grounded in a broader principle of valuation: a statutory fiction created to cure an absence of ascertainable value cannot ordinarily be converted into an irrefutable minimum once the actual value is demonstrably available. In other words, fiction may fill a vacuum; it cannot necessarily erase reality.
The Revenue has maintained, including through CBIC Circular No. 225/19/2024-GST, dated July 11, 2024, that corporate guarantees were taxable even before Rule 28(2) was introduced and that their value for the earlier period could be determined under the then-existing provision. The HC drew a firm temporal boundary around Rule 28(2) and held that the specific valuation mechanism could not be used to impose GST for periods preceding that date. Guarantees that continued beyond the date could attract GST prospectively, but the newly created valuation fiction could not simply be projected backwards.
The judgment is equally significant for continuing guarantees. A guarantee executed before October 26, 2023, does not become permanently immune merely because of its date of birth. If it continues thereafter, the HC permits prospective taxation. It points towards an annual valuation based on the outstanding guaranteed exposure rather than mechanically taxing the original guaranteed amount for the entire tenure. This also creates tension with the CBIC’s earlier clarification concerning multi-year guarantees, which contemplated valuation based on the tenure of the guarantee.
The HC also clarifies that if a taxpayer has disclosed the transaction, adopted a legally tenable interpretation, and genuinely believed no tax was due, they cannot be deemed to have suppressed facts merely because the Revenue disagrees. The principle has special significance in GST, as where the law itself is unsettled, penalising a taxpayer for having adopted one side of the debate risks turning interpretative uncertainty into culpability.
Concluding remarks
A tax does not come into existence merely because a transaction can be described as an economic benefit, nor can a liability be made constitutionally complete merely by identifying a charging provision.
Taxation requires an entire statutory chain to function coherently: there must be a taxable event, a taxable person, a lawful measure of value, a constitutionally permissible temporal operation and a legally sustainable mechanism of recovery.
The Gujarat High Court’s position is now in conflict with the Bombay High Court’s decision in D.P. Jain & Co. Infrastructure Pvt. Ltd.[3], which took a substantially different view of gratuitous corporate guarantees, relying in part upon the Supreme Court’s Edelweiss jurisprudence.
Corporate groups should now examine their guarantees by date, beneficiary, consideration, tenure and outstanding exposure. Guarantees to banking companies and financial institutions must be distinguished from guarantees to vendors, trade creditors or other non-banking counterparties, because Rule 28(2) is expressly confined to the former category.
If an actual guarantee commission below 1% is charged, taxpayers should ensure that the number is not merely an accounting entry but a defensible commercial fact. Agreements, benchmarking studies, board approvals, accounting records and correspondence may become critical evidence. The judgment’s protection for actual consideration is not a licence to invent a number below 1%. It is protection for demonstrable reality. The immediate message is one of caution and opportunity: document the commercial reality, preserve the evidentiary trail, challenge unsupported retrospective demands, and do not allow an interpretative dispute to be casually dressed up as suppression.
[1] Torrent Power Ltd. v. Union of India [TS-592-HC(GUJ)-2026-GST]
[2] Commissioner of CGST and Central Excise v. Edelweiss Financial Services Limited, [TS-136-SC-2023-ST]
[3] D.P. Jain and Co. Infrastructure Pvt. Ltd. v. Union of India [TS-333-HC(BOM)-2026-GST].
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