Hon’ble Gujarat High Court in the case of Torrent Power Ltd & Ors has passed a significant order on the issue of taxability of the services of providing Corporate Guarantee by holding company to its subsidiary under GST.
The issue of taxability of corporate guarantee under GST stems from insertion of Rule 28(2) in CGST Rules,2017 whereby value of supply of services by way of corporate guarantee was deemed to be 1% of such guarantee per annum or actual consideration,whichever is higher.Subsequently, Rule 28(2) had been amended retrospectively w.e.f. 26.10.2023 vide Notn no. 12/2024-Central Tax dt. 10.07.2024.
Treatment under Service Tax Regime
Hon’be Supreme Court in the case of Edelweiss Financial Services Ltd ((2023) 5 Centax 58 (S.C.)) has held that no service tax is leviable on the activity of providing bank guarantee for subsidiary company without consideration.
Circular no 204/16/2023-GST dt. 27.10.2023
Board vide the said circular clarified that the activities of providing corporate guarantee by a holding company to its subsidiary attracts GST, being supply of services between related parties as per provisions of Schedule I of CGST Act, 2017 even without a consideration and value of same shall be arrived under Rule 28 of CGST Rules,2017 prior to insertion of Rule 28(2) and in terms of Rule 28(2) w.e.f. 26.10.2023.
GST Regime and Bombay High Court decision in the matter of D.P.Jain & Co. Infrastructure Ltd dt 06.05.2026 ((2026) 42Centax 208 (BOM.))
While relying upon Hon’ble Supreme Court decision in the matter of Edelweiss Financial Services Ltd. ((2023) 42 Centax 208 (S.C.)),Hon’ble Bombay High Court held that in absence of any consideration and in view of the fact that the holding company is not in the business of issuance of corporate guarantee, GST is not leviable on corporate guarantee given by a holding company to its subsidiary company.
Gujarat High Court decision in the matter of Torrent Power Ltd. & Ors. ( Special Civil Appeal No 12175 of 2024) dt 14.08.2026
While upholding constitutional validity of Rule 28(2) of CGST Rules,2017 after reading down the expression “whichever is higher” from the valuation mechanism, Hon’ble Gujarat High Court held that GST is leviable in view of Schedule I entry of supply between related parties without consideration w.e.f. 26.10.2023 on fresh guarantees or guarantees in force barring retrospective GST on corporate guarantees.
Gujarat HC vis-a-vis Bombay HC
| Torrent power Ltd. vs UOI | D.P. Jain & Co. Infrastructure Ltd vs UOI | |
|---|---|---|
| Taxibility | Corporate guarantee provided by related party is supply | Corporate guarantee furnished without consideration is NOT a supply |
| Rule 28(2) valuation | Rule 28 (2) upheld (read down) | Upheld |
| Pre 26.10.2023 | No retrospective application | _ |
| Net effect | Taxable prospectively as per Rule 28(2) with correct application | Not taxable in absence of consideration |
Way Forward
In the light of Gujarat High Court judgement, goal post has been shifted to the extent that corporate guarantee becomes taxable prospectively w.e.f. 26.10.2023 as against the Bombay High Court judgment which shelters holding company from taxability on the ground that such an activity is not covered under GST, being devoid of any consideration.
Therefore, the buck stops with the Supreme Court to decide issues that go beyond the constitutional validity of Rule 28(2).
Key issues before the Supreme Court
- Is a corporate guarantee, by itself, a “supply” under GST in terms of Schedule I read with Section 7 of CGST Act,2017?
- What exactly is the “supply” in a corporate guarantee, which is enforceable only in case of default?
- Is Rule 28(2) merely a valuation provision or does it effectively create the tax liability?
- Can the 1% deemed valuation apply where actual consideration is NIL?
- What is the taxable event for a continuing corporate guarantee?