Corporate Guarantee GST: the 1% Rule Stands, But Not Retrospectively — Gujarat High Court

The Gujarat High Court has upheld Rule 28(2) on corporate guarantees between related companies, but read down the words "whichever is higher" and held that the one per cent valuation cannot be applied to guarantees executed before 26 October 2023.

A corporate guarantee is the everyday arrangement where a parent company stands behind a bank loan taken by its subsidiary. Since 26 October 2023, Rule 28(2) of the CGST Rules has valued that guarantee, between related persons, at one per cent of the amount guaranteed per annum or the actual consideration charged, whichever is higher. The Gujarat High Court has now examined that rule, upheld it in the main, and cut it back in two respects.

First, the Court read down the words "whichever is higher". Where a group company actually charges a guarantee commission, GST is payable on what is charged; the deemed one per cent is meant for cases where nothing is charged, not a floor overriding a real, agreed price.

Second, the one per cent basis cannot be applied backwards to guarantees executed before 26 October 2023, when the rule did not exist. Demands raised on that footing for earlier periods do not survive.

What this means for you

If your group has given or received a corporate guarantee, pull the paperwork and check three dates: when the guarantee was executed, when it was renewed, and the period your notice covers. A demand computed at one per cent for a pre-October 2023 period is now open to serious challenge, and so is a demand that ignores a commission you genuinely charged.

CBIC's own position is set out in Circular No. 204/16/2023-GST dated 27 October 2023 (https://gstcouncil.gov.in/sites/default/files/2024-06/circular-no-204-16-2023.pdf) and Circular No. 225/19/2024-GST dated 11 July 2024 (https://gstcouncil.gov.in/sites/default/files/2024-09/circular-no-225-2024.pdf).

Topics:corporate guarantee GSTRule 28(2)Gujarat High Courtrelated party valuationguarantee commissionCircular 204/16/2023Circular 225/19/2024retrospective demandholding company subsidiaryChennai GSTTamil Naduinput tax credit

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