The Gujarat High Court has declared that goods and services tax cannot be levied on corporate guarantees issued prior to October 26, 2023, providing relief to affected companies and sparking potential wider legal implications.
The Gujarat High Court has ruled that goods and services tax cannot be imposed on corporate guarantees issued before October 26, 2023, a decision that gives relief to companies that had challenged the levy as retrospective and unfair. The bench of Justices A S Supehia and Vaibhavi D Nanavati said the tax could not be applied to guarantees executed before that date, but that the levy may apply going forward where the guarantee continues beyond the rule change.
The ruling comes after the Central Board of Indirect Taxes and Customs notified in October 2023 that GST at 18% would apply to corporate guarantees between related parties, such as parent companies and subsidiaries, from October 26 that year. Under the valuation rule, the tax base is the higher of the actual consideration charged or 1% of the guarantee value, a formulation that had already drawn objections from tax advisers and companies worried about past transactions.
In its reasoning, the court said a backdated charge would be harsh, unjust and contrary to constitutional protections because businesses structure their finances on the law as it stands at the time. It also held that collections for the earlier period would run into the principle against unjust enrichment, as the revenue had no lawful basis to collect tax on guarantees issued before the rule took effect. At the same time, the bench upheld the underlying valuation framework for guarantees after October 26, 2023.
Lawyers said the ruling may have wider consequences than the immediate relief it grants. Ritesh Kanodia of Aurtus Legal said the deeper dispute was always whether a parent’s guarantee for its subsidiary is a taxable service or simply part of protecting an investment, a question he expects may reach the Supreme Court. Sudipta Bhattacharjee of Khaitan & Co said the court had effectively softened the “whichever is higher” language in the valuation rule, meaning an agreed lower consideration may in some cases serve as the GST base, potentially opening the door to refund claims and influencing similar disputes in other High Courts.
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