Gujarat HC Strips Retroactive GST on Corporate Guarantees

"The imposition of levy of GST on 1 per cent valuation per annum to the corporate guarantee prior to the introduction of Rule 28(2) of the CGST Rules w.e.f October 26, 2023 is harsh and unfair to the tax payers," the bench said. The court also ruled that tax collection for the period before the rule's introduction is hit by the doctrine of unjust enrichment, since the revenue had no legal basis for the levy.

The court "read down" the phrase "whichever is higher" in the valuation provision. If parties in a corporate guarantee transaction agreed to a consideration lower than 1% of the guarantee amount, that lower figure should be accepted as the taxable base for GST, the court held. Many taxpayers may now become eligible for refunds of GST already deposited, said Sudipta Bhattacharjee, Partner at Khaitan & Co. "This is a very significant development and would have repercussions on pending matters on similar issues across various other High Courts in India," he said.

Ritesh Kanodia, Partner at Aurtus Legal, said the real controversy was never about the 1% valuation rate but whether a parent company's decision to guarantee a subsidiary constitutes a commercial service or is merely an incident of shareholding. "In that sense, the judgment resolves important questions on valuation and retrospectivity but stops short of addressing the more fundamental issue of taxability," Kanodia said. "The debate on whether a corporate guarantee represents a taxable supply or a shareholder function therefore remains unresolved and is likely to be tested before the Supreme Court."

The ruling provides immediate relief for companies that furnished guarantees before October 26, 2023, but leaves the core question of taxability open for higher courts.