Gujarat High Court Upholds GST on Corporate Guarantees but Reads Down Rule 28(2) Valuation

The Gujarat High Court has delivered a significant ruling on the GST treatment of corporate guarantees, upholding the levy in principle while restricting how Rule 28(2) of the Central Goods and Services Tax Rules, 2017 can be applied. In Torrent Power Ltd. v. Union of India & Ors., decided on 14 August 2026, the Court held that a corporate guarantee given by a holding company for the benefit of a related subsidiary can constitute a taxable supply of service even where no separate consideration is charged.

What the High Court decided

The Court upheld the constitutional validity of Rule 28(2) and Section 15(4) of the CGST Act, but read down the words “whichever is higher” in Rule 28(2). The rule prescribes a deemed valuation mechanism for corporate guarantees between related persons. The High Court found that forcing taxpayers to adopt the higher of the prescribed one-per-cent value or the actual consideration could produce an arbitrary result where an actual guarantee commission or charge is identifiable.

The practical effect is that the one-per-cent valuation mechanism has not been struck down altogether. Instead, the Court preserved Rule 28(2) while removing the mandatory higher-of-two approach. Where actual consideration is ascertainable, the ruling supports valuation by reference to that actual charge rather than automatically requiring the higher deemed amount.

Corporate guarantees remain taxable supplies

The petitioners had challenged the taxability of guarantees given by holding companies for credit facilities of subsidiaries. The Court held that a holding company and its subsidiary are related persons and that a guarantee supporting the subsidiary’s financing can be connected with or incidental to the holding company’s business. On that basis, the guarantee can fall within Section 7(1)(c) read with Schedule I of the CGST Act even when no monetary consideration is separately paid.

The Court also rejected the argument that such a corporate guarantee should be treated as an actionable claim outside GST. It distinguished the contingent obligation created by a guarantee from a primary claim to a debt.

No retrospective use of Rule 28(2) before 26 October 2023

A major part of the ruling concerns timing. Rule 28(2) was introduced with effect from 26 October 2023. The High Court held that the deemed valuation rule could not be applied to periods before its introduction. However, where an older guarantee continued beyond 26 October 2023, GST consequences could arise prospectively from that date.

This distinction is important for corporate groups facing notices or demands relating to guarantees executed before the rule was introduced. Tax teams will need to separate the original execution date, the period for which the guarantee remained in force, and any actual consideration charged.

Guarantee not treated as continuous supply

The Court also held that a corporate guarantee is not a “continuous supply of services” merely because the guarantee obligation remains alive until expiry, invocation, revocation or discharge. The ruling treated the guarantee as a one-time undertaking with a continuing obligation rather than a continuous supply requiring periodic payment obligations.

Section 74 proceedings also examined

In connected matters, the Court held that a dispute over interpretation of the GST provisions governing corporate guarantees did not by itself establish fraud, wilful misstatement or suppression. The ruling therefore has implications beyond valuation, particularly where demands were raised under Section 74 on the basis of alleged deliberate non-compliance.

Why this matters for finance and tax teams

For CAs, GST professionals and corporate finance teams, the ruling creates a need to review existing guarantee arrangements with greater precision. Businesses should identify guarantees between related entities, the date each guarantee was issued, whether it continued after 26 October 2023, whether any commission or fee was actually charged, and how GST was valued and discharged.

CBIC’s Circular No. 204/16/2023-GST dated 27 October 2023 had clarified that corporate guarantees between related persons can be treated as supplies even without consideration and that valuation would follow Rule 28(2). The Gujarat High Court judgment now limits the operation of that valuation approach by reading down the mandatory “whichever is higher” language.

The ruling may also affect pending litigation, refund or adjustment positions and the design of future inter-company guarantee arrangements. Businesses should avoid treating it as a blanket exemption from GST: the High Court upheld taxability in principle and preserved Rule 28(2), subject to the reading down and the restriction on retrospective application.

Corporate groups should map their guarantee portfolio by date, relationship, consideration and continuing period, then reassess GST valuation in light of the Gujarat High Court ruling. Because similar disputes are pending before other High Courts and further appellate developments are possible, taxpayers should monitor subsequent judicial or administrative guidance before taking irreversible positions.

Key takeaway

The ruling materially affects a recurring GST issue for corporate groups and tax practitioners, with direct implications for valuation, legacy guarantees, Section 74 proceedings and pending litigation.