Ahmedabad: The Gujarat High Court on Friday restrained the retrospective imposition of Goods and Services Tax on corporate guarantees issued before 26 October 2023, while upholding a 1 per cent deemed valuation for guarantees that extend beyond that date. The bench also curtailed the expression "whichever is higher" in the valuation provision, narrowing the scope of tax demand in the cases before it.
Background and legal context
The controversy stems from a 2023 Central Board of Indirect Taxes and Customs (CBIC) position and a related rule, Rule 28(2), introduced with effect from 26 October 2023. That rule prescribed a mandatory deemed value of 1 per cent of the amount guaranteed — or the actual consideration charged, whichever was higher — for corporate guarantees between related parties such as parent and subsidiary.
Following introduction of the rule, the words "per annum" were subsequently inserted with retrospective effect from the same date. Companies challenged the measure, arguing that guarantees furnished by a holding company for its subsidiary without any fee or commission should not be treated as a taxable supply and that applying the 1 per cent mechanism retrospectively was unlawful.
Gujarat HC ruling and immediate directions
The court held that GST cannot be levied retrospectively on guarantees furnished before 26 October 2023, except where the guarantee continues beyond that date — in which event tax would apply from that day onwards. The bench therefore limited the retrospective application of the rule and read down the "whichever is higher" phrase, while retaining the deemed valuation mechanism of 1 per cent.
In addition, the court quashed show-cause notices and orders issued under Section 74 of the Central Goods and Services Tax Act in the matters before it. Section 74 concerns recovery of tax alleged to be unpaid due to fraud, wilful misstatement or suppression of facts. 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.
"This is a very significant development and would have repercussions on pending matters on similar issues across various other High Courts in India," said Sudipta Bhattacharjee, Partner, Khaitan & Co., as reported.
Implementation timeline
The court directed that its instructions be implemented within three months in the matters before it, providing a defined window for tax authorities and affected taxpayers to act on the judgement.
| Date / Period | Event |
|---|---|
| 26 October 2023 | CBIC position and Rule 28(2) prescribing 1% deemed valuation came into effect |
| Post-26 Oct 2023 | Insertion of "per annum" into the rule with retrospective effect |
| 14 August 2026 | Gujarat High Court hearing and judgment restraining retrospective levy |
Practical implications for businesses and tax administration
For corporate groups and financial institutions in Gujarat, the judgement reduces immediate exposure to retrospective tax demands arising from guarantees issued before 26 October 2023. Companies that had not charged a fee for intra-group guarantees may now have a firmer legal footing against retrospective GST claims, provided the guarantee did not extend beyond the cut-off date.
For guarantees that continue after 26 October 2023, the court made clear that tax liability may arise from that date onwards, applying the 1 per cent deemed valuation as the basis for assessing taxable value. This preserves a simplified valuation route for tax authorities while removing the automatic primacy of the higher of actual consideration or deemed value.
The quashing of Section 74 notices in the contested matters will be particularly relevant to companies facing allegations of fraud or deliberate evasion tied to valuation of guarantees. The court’s focus on absence of material showing intent to evade tax signals stricter scrutiny before invoking penal recovery provisions in similar disputes.
Wider consequences and next steps
- Tax departments across states may need to recalibrate demand notices on guarantees furnished before 26 October 2023.
- 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.
The Gujarat High Court’s decision will be closely watched by the corporate sector and tax professionals for its potential to influence parallel proceedings nationwide. The matter in the Gujarat High Court concerned specific petitions; broader legal questions may yet be resolved by higher fora depending on appeals and further litigation.
