Two High Courts, one identical rule, two opposite outcomes. GST on corporate guarantees has become one of the messiest unresolved questions in Indian tax law — and it all comes down to whether a promise, with no money actually changing hands, can be taxed at all.
Taxing a Promise: The Unsettled Story of GST on Corporate Guarantees
Almost every company that has gone through a loan sanction process has run into this: a bank wants security, a subsidiary doesn't have enough to offer on its own, and the parent company steps in with a corporate guarantee — a written undertaking to repay the subsidiary's loan if it defaults. No cash moves at the moment the guarantee is given. It's a promise, contingent on a future event that may never happen. The loan gets sanctioned on the strength of that promise alone.
That raises a genuinely hard question: can a tax be imposed on something that is, at the time it's given, just a contingent promise with no payment attached? And if the answer is yes, how do you even value it? This question has now made its way through the GST Council, multiple High Courts, and is currently pending before the Delhi High Court in a batch of petitions — and in the meantime, businesses are the ones stuck fielding show-cause notices and tax demands while the law sorts itself out.
How Corporate Guarantees Are Treated Under GST
Under the earlier service tax regime, the Supreme Court had already weighed in on a version of this question — holding that a corporate guarantee given to group companies without any consideration could not be treated as a taxable service. No payment, no service, no tax. Straightforward enough.
GST changed the framing. Under GST law, transactions between related persons are treated as a "supply" even without any consideration changing hands — this comes from Rule 28 of the CGST Rules, 2017. A parent and subsidiary are related parties, so a corporate guarantee between them falls squarely within that net, at least on a plain reading.
The bigger complication came in 2023, when Rule 28(2) was introduced specifically to value corporate guarantees issued between related parties. It fixed a deeming value: 1% of the guaranteed amount, calculated annually, regardless of whether the guarantee was ever invoked or any actual consideration was paid. In 2024, further clarifications followed to explain how this valuation was supposed to work in practice.
Why the 1% figure matters more than it looks: On a guarantee covering a ₹500 crore loan, a flat 1% annual valuation means ₹5 crore is treated as the taxable value of the "supply" every single year the guarantee remains in force — whether or not the subsidiary ever defaults, and whether or not any money ever actually flows to the parent.
The Split: Bombay High Court vs. Gujarat High Court
The constitutional validity of Rule 28(2) and its 2023-24 amendments was challenged in several High Courts, and the two leading rulings so far point in genuinely different directions.
The Bombay High Court held that a corporate guarantee is enforceable only if the principal debtor actually defaults — until then, it's a contingent liability, not an active one. Since no consideration flows to the guarantor in the ordinary course, the Court reasoned there is no "taxable supply" at all under Section 9 of the CGST Act. It leaned heavily on the Supreme Court's earlier reasoning in the Edelweiss case. Notably, though, the Bombay High Court stopped short of striking down Rule 28(2) itself — it found no taxable supply in the facts before it, without invalidating the valuation rule as a matter of law.
The Gujarat High Court, in Torrent Power Ltd. v. Union of India, took a meaningfully different path. Rather than deciding there was no taxable supply, it went after the mechanics of Rule 28(2) directly — reading down the phrase "whichever is higher" in the rule, and holding that forcing taxpayers to adopt whichever is greater of actual consideration or the 1% benchmark was arbitrary. It also held that Rule 28(2) cannot apply retroactively to guarantees furnished before 26 October 2023, the date the rule was introduced — applying it retroactively, the Court said, would impose an entirely new tax burden and violate Articles 14 and 19(1)(g) of the Constitution.
On top of that, the Gujarat High Court quashed proceedings that had invoked the extended period of limitation under Section 74 of the CGST Act — holding that a genuine interpretational dispute of this kind cannot, by itself, be treated as wilful suppression with intent to evade tax.
| Issue | Bombay High Court | Gujarat High Court |
|---|---|---|
| Is there a taxable supply? | No — no consideration flows unless default occurs | Not decided on this ground |
| Validity of Rule 28(2) | Upheld, not struck down | "Whichever is higher" read down as arbitrary |
| Retrospective application | Not addressed on this basis | Barred for guarantees before 26 Oct 2023 |
| Extended limitation (Sec. 74) | Not addressed on this basis | Quashed — interpretational dispute ≠ suppression |
A Useful Contrast: How Liquidated Damages Are Treated
It's worth comparing corporate guarantees with liquidated damages, because both are contingent liabilities that only turn into an actual payment obligation if something goes wrong — a default in one case, a breach of contract in the other. The CBIC, through a circular dated 3 August 2022, clarified that GST is not payable on liquidated damages for breach of contract, on the reasoning that such payments are compensatory in nature and don't represent consideration for any service.
That contrast sharpens the puzzle around corporate guarantees. If a contingent, compensation-like payment triggered by breach isn't taxed, why should a contingent guarantee — which similarly produces no actual payment unless a default occurs — be taxed upfront every year on a deemed 1% valuation? The two situations sit close enough to each other that the differing GST treatment is hard to justify on principle alone.
Where This Leaves Taxpayers
With the Bombay and Gujarat High Courts landing in different places, the law on GST and corporate guarantees is genuinely unresolved right now, and it's likely the department will take this up before the Supreme Court to settle the conflict. Until that happens, taxpayers are left navigating divergent High Court positions depending on jurisdiction, with the Delhi High Court's pending batch of petitions adding yet another data point still to come.
A number of practical questions remain open regardless of how the constitutional challenge is ultimately resolved: why the 1% benchmark should be applied on an annual basis at all; how it should work for long-term, open-ended, or auto-renewing guarantees where there's no clean annual boundary; and whether the valuation should be pegged to the amount actually drawn or outstanding rather than the entire sanctioned limit, which may never be fully utilised. Continuing guarantees, renewals, rollovers, amendments, refinancing, changes in lender, and guarantees that are simply never revoked all raise the same underlying question in slightly different forms. And more fundamentally: can a valuation rule like Rule 28(2) even apply before it's first established that a taxable supply exists in the first place?
Who this hits hardest: Infrastructure, real estate, power, and EPC businesses are particularly exposed here, since guarantees in these sectors often run for years, cover large sanctioned amounts, and are tied to project financing structures. The provisions also create real cash-flow and credit mismatch issues — especially for businesses that can't fully utilise the input tax credit generated on a guarantee that never actually gets invoked.
The takeaway: whether GST applies to a corporate guarantee at all — and if so, how it should be valued — remains genuinely unsettled, with the Bombay and Gujarat High Courts diverging on key points and the Delhi High Court yet to rule. Industry has flagged annualization, tenure, partial drawdowns, and transitional treatment as the areas most in need of clear GST Council guidance.
This post is based on an article authored by Brijesh Kothary, Partner, and Saundarya Sinha, Senior Associate, at Khaitan & Co., and summarizes the legal position as reported as of September 2026. It is a general informational overview and not legal advice — consult a qualified tax professional for guidance specific to your facts.