The Gujarat High Court has upheld the validity of GST on corporate guarantees issued by holding companies, but rejected the ‘whichever is higher’ valuation clause, providing clarity for businesses and limiting retrospective application of the rule.
The Gujarat High Court has upheld the goods and services tax on corporate guarantees issued by holding companies for their subsidiaries, but it has removed the rule that tried to tax them at whichever amount was higher: 1% of the guarantee value or the actual fee charged. The ruling, delivered on August 14 in Torrent Power Ltd. v. Union of India, gives companies a clearer framework on how such guarantees should be valued under GST. The court said the levy itself is valid because the GST law treats certain transactions between related parties as supplies even where no fee is paid.
The bench also upheld the constitutional validity of Rule 28(2) of the CGST Rules and Section 15(4) of the CGST Act, which allow the government to set valuation methods when normal transaction value is difficult to determine. But the judges found the “whichever is higher” wording to be arbitrary. In practice, that means the deemed 1% valuation can still apply where no actual commission is charged, while a real fee, if one exists, should be used for tax purposes instead of forcing a higher deemed amount.
The court also drew a line on timing. According to several reports on the judgment, the 1% valuation method cannot be applied retrospectively to guarantees issued before October 26, 2023, when the rule came into force. That point matters for long-running disputes, including guarantees dating back many years, because the court appears to have limited the new valuation rule to periods from that date onwards, including cases where a guarantee continued after the rule took effect.
The decision is likely to matter most for large corporate groups that routinely use parent-company backing to support subsidiary borrowing without charging a separate fee. While the high court has confirmed that GST can attach to such arrangements, it has also pushed back against the tax authorities’ attempt to apply a harsher valuation method across the board. For finance teams, the ruling should reduce uncertainty on future guarantees and may also weaken demands based on pre-October 2023 periods.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
