AHMEDABAD: The Gujarat High Court on Friday upheld the constitutional validity of Rule 28(2) of the Central Goods and Services Tax Rules, 2017, which prescribes a valuation mechanism for corporate guarantees furnished by a holding company for a related entity, but limited the rule's retrospective application.
Court clarifies effective date and valuation wording
A division bench comprising Justice A.S. Supehia and Justice Vaibhavi D. Nanavati held that the levy prescribed under Rule 28(2) cannot be invoked in respect of corporate guarantees given prior to 26 October 2023. The judges, however, left open the possibility that where such guarantees continued beyond that date, the deemed valuation and GST treatment may apply from 26 October 2023 onwards.
The petitioners had challenged Rule 28(2), Section 15(4) of the CGST Act and subsequent Central Board of Indirect Taxes and Customs (CBIC) circulars dated 27 October 2023 and 11 July 2024. They argued that an unremunerated corporate guarantee provided by a holding company for a subsidiary is not a taxable supply of service and that Rule 28, being procedural in character, cannot by itself create a tax liability where none exists under Section 7 of the CGST Act.
"whichever is higher"
In its judgment the court also read down the phrase "whichever is higher" in the rule's valuation formula. Rule 28(2), introduced by Notification No. 52/2023 dated 26 October 2023, sets out that the value of a corporate guarantee given to a related recipient in India for obtaining finance is to be deemed as 1% of the amount guaranteed per annum or the actual consideration, with the proviso that this mechanism is subject to the recipient's eligibility for full input tax credit. Notification No. 12/2024 later clarified the words "per annum" with effect from the same date.
Industry impact and legal questions
The decision will be watched closely by corporates and tax professionals across Gujarat and India. Holding companies that furnish guarantees to group entities had faced uncertainty since the notification introducing Rule 28(2). The petitions before the High Court raised two interlinked issues: whether an unremunerated guarantee constitutes a taxable supply between related parties, and whether the government could prescribe a deemed valuation of 1%.
By sustaining the rule but limiting its temporal reach, the court has provided partial relief to companies that executed guarantees before 26 October 2023 while affirming the government's power to prescribe valuation norms for guarantees going forward. The judgment also reduces the potential for retrospective tax demands on transactions that had been considered non-taxable at the time they were executed.
What the rule provides — at a glance
- Valuation benchmark: Deemed value = 1% of guaranteed amount per annum or actual consideration, subject to conditions.
- Applicability date: Rule inserted with effect from 26 October 2023; Court declined levy for guarantees furnished before that date.
- Input tax credit proviso: Recipient eligible for full input tax credit may be treated under a prescribed proviso.
| Date | Event |
|---|---|
| 26 Oct 2023 | Notification No. 52/2023 inserted Rule 28(2) in CGST Rules |
| 27 Oct 2023 | CBIC Circular (challenged in petitions) |
| 11 Jul 2024 | Further CBIC Circular (also challenged) |
| Notification No. 12/2024 | Inserted words "per annum" with retrospective effect from 26 Oct 2023 |
Practical implications for Gujarat corporates
For businesses based in Gujarat — particularly financial services groups, manufacturing houses with large intra-group financing arrangements and conglomerates with multiple subsidiaries — the ruling clarifies exposure to GST claims on past guarantees. Companies that provided guarantees before 26 October 2023 are unlikely to face levy on those past instruments, unless the guarantee persisted beyond that date. Going forward, entities must consider the deemed valuation for GST compliance and reporting.
Tax practitioners will need to advise clients on documentation, disclosure and whether recorded consideration or the deemed 1% benchmark better represents taxable value. The eligibility for input tax credit on the recipient side also remains a significant factor in determining final GST liability.
The bench issued its ruling after hearing arguments that Rule 28 is primarily a machinery provision and cannot, by itself, create a taxable event absent supply under Section 7. By upholding the rule's validity while narrowing its retrospective operation and reading down contested wording, the court has struck a balance between statutory taxation powers and protections against ex post facto levy.
The full text of the judgment records the court's reasoning on both constitutional and statutory grounds and will be analysed further by tax law specialists and industry associations in the coming weeks.
