GST on Corporate Guarantees Between Related Companies: Gujarat High Court Clarifies Taxability and Valuation 

Introduction

The tax treatment of corporate guarantees furnished by holding companies for their subsidiaries has been a significant issue under India’s Goods and Services Tax (GST) framework, particularly where no separate consideration is charged. In Torrent Power Ltd. v. Union of India, decided on 14 August 2026, the Gujarat High Court examined the taxability of such guarantees under the Central Goods and Services Tax Act, 2017 (CGST Act) and the validity of the valuation mechanism under Rule 28(2) of the CGST Rules, 2017. 

The judgment addresses three important questions: whether a corporate guarantee between related companies can constitute a taxable supply, how such a supply is valued, and whether the prescribed 1% valuation mechanism applies to guarantees furnished before 26 October 2023. 

Background of the Dispute

The petitions challenged the levy of GST on corporate guarantees furnished by holding companies for their subsidiaries, including guarantees provided without consideration. The petitioners questioned whether such arrangements constituted a supply of services and challenged the constitutional validity of Rule 28(2) of the CGST Rules. 

Rule 28(2) prescribes a valuation mechanism for services by way of corporate guarantees provided between related persons to a banking company or financial institution on behalf of the recipient. It specifies a value of 1% of the amount of the guarantee offered per annum or the actual consideration, whichever is higher. 

The petitioners argued that a corporate guarantee without consideration should not automatically be treated as a taxable supply and that the prescribed valuation mechanism could not independently create a taxable event. 

Key Findings of the Gujarat High Court

1. Corporate guarantees between related companies can constitute a taxable supply

The High Court held that furnishing a corporate guarantee by a holding company for its subsidiary can constitute a supply of services under Section 7 of the CGST Act, read with Entry 2 of Schedule I, even where no separate consideration is charged. 

The Court observed that a corporate guarantee facilitates the subsidiary’s access to commercial borrowing and may be connected with the business activities of the related entities. The absence of a separately charged fee does not, by itself, prevent the transaction from being treated as a taxable supply under the statutory framework. 

2. Rule 28(2) was upheld, but the valuation mechanism was read down

The Court upheld the constitutional validity of Rule 28(2), but read down the words “whichever is higher”. Accordingly, the rule cannot be applied on the basis that the prescribed 1% value must invariably prevail over the actual consideration in every case. 

This aspect of the ruling is relevant to related-party transactions where the actual consideration differs from the value determined under the prescribed mechanism. Businesses should distinguish the question of whether a taxable supply exists from the separate question of how that supply must be valued. 

3. The 1% valuation mechanism cannot be applied to guarantees furnished before 26 October 2023

The High Court held that applying the 1% valuation mechanism under Rule 28(2) to guarantees furnished before 26 October 2023 was unconstitutional. However, it clarified that the levy under the rule could apply from that date where the guarantees continued. 

The ruling therefore requires businesses to examine the date on which the guarantee was furnished and whether it continued beyond 26 October 2023. The relevant facts and applicable legal provisions must be assessed before determining the GST treatment for a particular period. 

4. Time of supply requires attention to the relevant accounting records

The Court considered the subsidiary’s recording of the corporate guarantee in its books relevant to determining the time of supply. It observed that the guarantee may be reflected in the books on a recurring annual basis, with implications for determining the relevant period and valuation. 

The Court did not treat the arrangement as a continuous supply merely because the guarantee remained operative over time. Businesses should therefore examine the accounting treatment, guarantee documentation and relevant tax periods rather than assume that a guarantee automatically constitutes a continuous supply. 

Practical Implications for Corporate Groups

Holding companies and subsidiaries should review corporate guarantees as part of their GST compliance and related-party transaction assessments. Relevant considerations include: 

• The date on which each guarantee was furnished and whether it continued beyond 26 October 2023. 

• The identity and location of the recipient and the nature of the underlying borrowing arrangement. 

• The consideration, if any, and the valuation method applicable under Rule 28(2). 

• The guarantee amount, relevant accounting entries and tax periods involved. 

• Any existing GST notices or demands relating to guarantees furnished before the introduction of Rule 28(2). 

Businesses should also distinguish between the existence of a taxable supply and the valuation of that supply. A conclusion on one issue does not automatically resolve the other. 

Conclusion

The Gujarat High Court’s decision in Torrent Power Ltd. v. Union of India provides important guidance on GST treatment of corporate guarantees between related companies. While the Court upheld the taxability framework and the validity of Rule 28(2), it read down the valuation provision and restricted the application of the 1% mechanism to guarantees furnished before 26 October 2023. 

The decision is relevant to corporate groups reviewing GST exposure on guarantees provided to support subsidiary borrowings, particularly where such arrangements span multiple financial years. 

Practical takeaway: Corporate groups should review their guarantee documentation, dates, accounting records and valuation methodology to determine the applicable GST treatment for each relevant tax period.

Last Updated on 12 October, 2026