The Gujarat High Court has barred the levy of Goods and Services Tax (GST) on corporate guarantees issued before October 26, 2023, except when the guarantee continues beyond that date, which will attract tax from that day onwards. According to reports from Business Standard, the court also read down a section of the tax provision--'whichever is higher'--but retained the 1% valuation mechanism for guarantees continuing beyond the specified date. The ruling came in response to a dispute that arose after the government introduced Rule 28(2) from October 26, 2023, which prescribed a mandatory deemed value of 1% of the amount guaranteed or the actual consideration, whichever was higher, for corporate guarantees between related parties. The controversy stems from a 2023 Central Board of Indirect Taxes and Customs (CBIC) position and the related rule, with the words 'per annum' subsequently inserted with retrospective effect from the same date.
As reported by Business Standard, a corporate guarantee is an assurance by a party to a bank that it will repay the debt if the other party defaults. 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. The dispute arose after the government introduced Rule 28(2), with the words 'per annum' 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 and that applying the 1% mechanism retrospectively was unlawful. For guarantees that continue after 26 October 2023, the court made clear that tax liability may arise from that date onwards, applying the 1% deemed valuation as the basis for assessing taxable value.
According to Business Standard, the court found the 'whichever is higher' formula arbitrary and noted that actual charges or commission on corporate guarantees in the cases before it ranged from 0.25% to 0.3%. The court held that forcing taxpayers to pay GST on a deemed value of 1% even when actual consideration was lower would impose an excessive burden and violated Article 14 and Article 19(1)(g) of the Constitution. The court also quashed orders and show-cause notices issued under Section 74 of the CGST Act in the cases before it, finding that the disputes involved interpretation of GST provisions and found no material to indicate deliberate suppression or intention to evade tax. The judgement noted that the disputes largely raise questions of statutory interpretation and that there was no material to indicate deliberate suppression or an intention to evade tax in these cases.
As reported by Business Standard, the court upheld the taxability of corporate guarantees even where no consideration is received, holding 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, where 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 noted that several guarantees had been issued between 2012 and 2023, including before the introduction of GST in July 2017, and held that applying the 1% valuation retrospectively imposed a new tax burden for a period when the specific valuation mechanism did not exist. The court's focus on absence of material showing intent to evade tax signals stricter scrutiny before invoking penal recovery provisions in similar disputes.
According to Business Standard, the directions of the Gujarat High Court are to be implemented within three months, as stated in the judgement. Sudipta Bhattacharjee, Partner at Khaitan & Co, described this as a very significant development that would have repercussions on pending matters on similar issues across various other High Courts in India. The court's decision reduces immediate exposure to retrospective tax demands arising from guarantees issued before 26 October 2023, particularly benefiting companies that had not charged a fee for intra-group guarantees. Tax departments across states may need to recalibrate demand notices on guarantees furnished before 26 October 2023, while pending litigations in other High Courts and tribunals on the GST treatment of corporate guarantees could be affected by this judgement. Companies should review intra-group guarantee practices, documentation and accounting disclosures for exposures beyond 26 October 2023, as the matter will be closely watched by the corporate sector and tax professionals for its potential to influence parallel proceedings nationwide.
