In a landmark ruling on the taxability of corporate guarantees under GST, the Gujarat High Court (Ahmedabad Bench) has upheld the constitutional validity of Rule 28(2) of the CGST Rules and the levy of 1% GST on corporate guarantees furnished by Holding Companies to lenders on behalf of their subsidiaries, while striking down the expression “whichever is higher” as arbitrary and violative of Article 14 and 19(1)(g) of the Constitution. The Court further held that the retroactive application of the levy to guarantees executed prior to Oct 26, 2023 is unconstitutional, and quashed all proceedings under Section 74 of the CGST Act.
The Court held that the execution of a corporate guarantee by a Holding Company in favour of its subsidiary constitutes a “supply of service” under Section 7(1)(c) of the CGST Act read with Article 2 of Schedule I, since the Holding Company and subsidiary are “related persons” under the Explanation to Section 15, and the guarantee is furnished in the course or furtherance of business. The Court further held that the corporate guarantee satisfies the ingredients of Article 5(e) of Schedule II, as it constitutes “agreeing to the obligation to do an act” within the meaning of that provision.
Also read SC Dismisses Reliance’s Appeal; Imposes ₹10 Lakh Costs for Delaying 20-Year-Old NTPC Gas Supply Suit
On the constitutional validity of Rule 28(2), the Court upheld the Rule as intra vires the CGST Act and Articles 14, 19(1)(g), and 265 of the Constitution, except to the extent of the expression “whichever is higher.” The Court reiterated that the expression “whichever is higher” is arbitrary and violative of Article 14 and 19(1)(g) since it does not confer any option to the corporate guarantor to pay GST on the actual commission or charge when such actual consideration is lower than 1%. The Court read down this expression to mean that the valuation shall be the actual consideration or 1%, whichever is lower, thereby preserving the constitutional validity of the Rule.
On the retroactive application of Rule 28(2), the Court held that the levy of GST on corporate guarantees executed prior to 26.10.2023 (the date of insertion of Rule 28(2)) is violative of Articles 14 and 19(1)(g) of the Constitution, as it imposes an unexpected financial burden on taxpayers who arranged their financial affairs based on the prevailing law. However, the Court clarified that the levy is permissible for periods crossing the date of introduction of Rule 28(2), since the taxable event occurs every year as long as the guarantee subsists. The Court also held that the invocation of Section 74 of the CGST Act against the petitioners was arbitrary and tainted with non-application of mind, since the disputed interpretation about the operation of Rule 28(2) does not constitute “wilful suppression” or fraud.
The Division Bench comprising Justice A.S. Supehia and Justice Vaibhavi D. Nanavati undertook a detailed examination of the statutory architecture of GST, beginning with the observation that the GST regime marks a decisive departure from the earlier sale-centric taxation model and instead adopts a supply-centric and destination-based structure. The Court relied heavily on the Supreme Court’s decision in Directorate General of Goods and Services Tax Intelligence (HQS) Vs. Gameskraft Technologies [2026] 186 taxmann.com 1232 (SC), which held that Section 7 of the CGST Act defines “supply” with a broad brush and provides an inclusive definition, and that the expression “supply” must receive a purposive and expansive interpretation consistent with the constitutional and statutory architecture of GST.
The Court observed that a corporate guarantee is a tripartite arrangement involving the principal debtor (subsidiary), the creditor bank, and the surety (Holding Company), encompassing three distinct yet interlocking contracts. By applying Sections 126, 127, 140, and 145 of the Indian Contract Act, 1872, the Court held that the consideration for the guarantee flows directly from the creditor bank to the subsidiary by way of advancing the credit facility, and the Holding Company provides the guarantee in exchange for this benefit being conferred upon its subsidiary. The Court further observed that Section 145 of the Contract Act creates an implied promise by the principal debtor to indemnify the surety, which establishes the subsidiary as the recipient of services under Section 2(93) of the CGST Act.
On the issue of whether corporate guarantees qualify as “business” under Section 2(17) of the CGST Act, the Court relied on the Supreme Court’s decision in Board of Trustees of the Port of Madras and held that even if the main activity of the Holding Company is not lending money, extending the guarantee is “business” because it is incidental or ancillary to its main commercial activity. The Court observed that the definition of business is transaction or activity centric and does not consider the purpose, quantity, or frequency of such transaction, and even one-time activities would constitute business under Section 2(17).
The Court rejected the petitioners’ argument that corporate guarantees constitute “actionable claims” excluded from the scope of supply under Schedule III of the CGST Act. The Court held that the definition of “debt” under Article 366(8) of the Constitution cannot be automatically imported for interpreting “actionable claim” under the Transfer of Property Act, 1882, and that a corporate guarantee represents a secondary, contingent liability that triggers on default of the principal debtor, which cannot be equated with a direct, primary right to claim a payment or debt.
On the valuation aspect, the Court observed that Rule 28(2) of the CGST Rules was inserted pursuant to the recommendations of the 52nd GST Council Meeting, which adopted the Safe Harbour Rule under Rule 10TD of the Income Tax Rules, 1962, prescribing a minimum acceptable commission of 1% for corporate guarantees. The Court noted that the GST Council acknowledged that banks charge different commissions ranging from 0.5% to 3%, and in some cases, no commission is charged at all.
Briefly, a batch of petitions were filed by various Holding Companies, including Torrent Power Limited, challenging the constitutional validity of Rule 28(2) of the Central Goods and Services Tax Rules, 2017 (CGST Rules) and Section 15(4) of the CGST Act, 2017, along with the CBIC Circulars dated Oct 27, 2023 and July 11, 2024, which mandated the levy of 1% GST on corporate guarantees furnished by Holding Companies to banking companies or financial institutions on behalf of their subsidiaries without any consideration.
The petitioners contended that corporate guarantees do not constitute a “supply” under Section 7 of the CGST Act, that the levy was arbitrary and confiscatory, and that the impugned Rule and Circulars travelled beyond the statutory framework. The Revenue, represented by the Additional Solicitor General, opposed the petitions and maintained that the levy was validly traceable to Section 7(1)(c) read with Schedule I and Schedule II of the CGST Act, with valuation prescribed under Rule 28(2).
The corporate guarantees in question were furnished by Holding Companies in favour of their subsidiaries’ lenders as collateral security to facilitate credit access, typically without any monetary consideration flowing between the parties. These arrangements were described as standard, non-commercial interventions within corporate groups, often unsecured and backed by the general creditworthiness of the parent company. The petitioners argued that under the erstwhile service tax regime, the Supreme Court in Edelweiss Financial Services had held that service tax was not leviable on corporate guarantees in the absence of consideration, and that the GST regime should not be interpreted to create a different result.
