Corporate guarantees without consideration deemed taxable supply under CGST Act; Rule 28(2) prescribing 1% per annum valuation upheld but “whichever is higher” clause struck down as arbitrary
In a significant judgment dated August 14, 2026, the Gujarat High Court (Division Bench) in a batch of writ petitions filed by Torrent Power Ltd and others, ruled that corporate guarantees furnished by holding companies to their subsidiaries constitute a taxable supply of service under the Goods and Services Tax (GST) regime. The court held that such guarantees satisfy the definition of “supply” under Section 7(1)(c) read with Schedule I and Schedule II of the CGST Act, 2017, even if executed without consideration.
The judgment meticulously analyzed the nature of corporate guarantees as tripartite contracts involving the principal debtor (subsidiary), creditor (bank/financial institution), and surety (holding company). It found that although the guarantee is contingent and executed without explicit consideration, the activity amounts to “agreeing to the obligation to do an act” under Entry 5(e) of Schedule II, and the subsidiary is the recipient of such service under Section 2(93). The court further ruled that extending corporate guarantees falls within the definition of “business” under Section 2(17) as an incidental or ancillary activity to the holding company’s trade or commerce.
Challenging the validity of Rule 28(2) of the CGST Rules, which prescribes a deemed valuation of 1% per annum on the guaranteed amount or actual consideration whichever is higher, the petitioners argued it was arbitrary and unconstitutional. The court upheld the validity of the Rule as intra vires the CGST Act and the Constitution but read down the phrase “whichever is higher” as arbitrary. It clarified that GST can be paid on the actual consideration if it is higher than 1%, thereby providing necessary flexibility to taxpayers.
The court also observed that the Rule applies prospectively from October 26, 2023, and declared that levy of GST on guarantees executed before that date is ultra vires. The time of supply was fixed under Section 13(2)(c) as the date when the subsidiary reflects the guarantee in its books of account, with yearly disclosure of the subsisting guaranteed amount triggering annual tax liability. The court rejected the characterization of corporate guarantees as actionable claims under the Transfer of Property Act and related statutes, affirming their taxable supply status.
Additionally, the court quashed the Circulars dated October 27, 2023, and July 11, 2024, to the extent they conflicted with the judgment, holding that circulars cannot create independent levy but only clarify statutory provisions. It also quashed the proceedings initiated under Section 74 of the CGST Act for alleged suppression of facts, finding no willful misstatement or fraud given the disputed interpretation of GST applicability on corporate guarantees.
The judgment directs refund of any excess GST deposited and permits adjustment of tax amounts. The Court allowed the writ petitions in part and mandated the Revenue to align future circulars with the present decision within three months.
This ruling clarifies the tax position on corporate guarantees in India, confirming their treatment as taxable services under GST, validating valuation methodology with safeguards against arbitrariness, and providing relief against retrospective tax demands.
Bottom Line :
Corporate guarantees furnished by Holding Companies to subsidiaries without consideration constitute a taxable supply of service under Section 7(1)(c) read with Schedule I and Schedule II of the CGST Act, 2017 - Rule 28(2) of the CGST Rules prescribing a uniform valuation of 1% per annum on such guarantees is valid but the expression "whichever is higher" is arbitrary and is read down.
Statutory provision(s): Section 7(1)(c), Section 2(17), Section 2(93), Section 9, Section 13(2)(c), Section 15(4), Section 15(5), Section 74 of CGST Act, 2017; Rule 28(2) of CGST Rules, 2017; Schedule I and Schedule II of CGST Act; Sections 126, 127, 140, 145 of Indian Contract Act, 1872; Section 3 of Transfer of Property Act, 1882
Torrent Power Ltd v. Union of India, (Gujarat)(DB) : Law Finder Doc id # 2961389
