GST on Corporate Guarantees: Supply Recognised, Valuation Restrained

Corporate Guarantees Face the Full GST Test

The Gujarat High Court judgment in Torrent Power Ltd. v. Union of India and Others, 2026-VIL-883-GUJ, dated 14.08.2026, is one of the most significant GST rulings on corporate guarantees. As reported in VIL, the judgment runs to 141 pages including headnotes, while the original judgment copy runs to 148 pages. The length reflects the depth of the controversy. The Court had to examine whether a corporate guarantee is a supply, whether consideration is necessary, how Schedule I applies to related persons, how Rule 28(2) values such guarantees, whether a later valuation rule can affect earlier guarantees, and whether Section 74 can be invoked in a genuinely debatable legal issue.

The controversy has wide commercial importance. In corporate groups, holding companies often give guarantees to banks or financial institutions to support loans taken by subsidiaries. In business language, such arrangements may be seen as group support, shareholder comfort or financial backing. GST law, however, tests the arrangement through statutory language. It asks whether such support amounts to a taxable supply of service, whether Schedule I can apply even without consideration, how the value should be determined, and whether guarantees already furnished in the past can be affected by a later rule.

The Gujarat High Court has answered these questions with careful balance. Corporate guarantees have not been placed completely outside GST merely because no fee or commission is charged. At the same time, Rule 28(2) has not been permitted to operate mechanically, harshly or retroactively. The judgment therefore recognises the GST framework, but controls its application through constitutional fairness, reasonable valuation and proper statutory discipline.

Supply Can Exist Even Without a Fee

The first major issue was whether a corporate guarantee given without any commission, fee or separate consideration can still amount to a supply under GST. The petitioners relied on the Service Tax position, particularly Commissioner of CGST & Central Excise v. Edelweiss Financial Services Ltd., MANU/SC/0648/2023, where a corporate guarantee without consideration was not treated as taxable under the Service Tax regime.

The Gujarat High Court treated GST as structurally different from Service Tax. Under Section 65B(44) of the Finance Act, 1994, service tax required an activity for consideration. Therefore, the absence of consideration had a decisive role under that regime. GST, however, contains a wider deeming framework. Section 7(1)(c) of the CGST Act, 2017 includes within “supply” the activities specified in Schedule I, even when made without consideration.

Entry 2 of Schedule I covers supplies of goods or services between related persons or distinct persons, when made in the course or furtherance of business. Therefore, in GST, the absence of consideration does not automatically take a transaction outside taxability. If the corporate guarantee is between related persons and is connected with business, it may still be treated as supply. This is the first clear departure from the Service Tax principle in Edelweiss Financial Services Ltd. Case Law.

A Corporate Guarantee Carries Legal Substance

The corporate guarantee was examined under the Indian Contract Act, 1872. Section 126 defines a contract of guarantee as one to perform the promise or discharge the liability of a third person in case of default. In such an arrangement, the holding company is the surety, the subsidiary is the principal debtor, and the bank or financial institution is the creditor.

Other related provisions of the Contract Act are also relevant. Section 127 recognises that anything done or any promise made for the benefit of the principal debtor may be sufficient consideration for the surety’s guarantee. Section 140 confers the right of subrogation on the surety after payment, and Section 145 recognises the implied promise of the principal debtor to indemnify the surety. These provisions show that a corporate guarantee is not merely an internal comfort letter or moral assurance. It creates a real legal obligation with enforceable consequences.

The benefit of the guarantee reaches the subsidiary because it receives credit support from the bank or financial institution. The holding company assumes a legal obligation for that benefit. Therefore, in the GST framework, such an arrangement may be treated as a supply of service between related persons under Section 7(1)(c) read with Schedule I.

Business Purpose Is Wider Than Core Business

The petitioners argued that issuing corporate guarantees was not their core business. They were not banks, lenders or financial institutions. On that basis, they submitted that a guarantee given by a holding company for its subsidiary could not be treated as a supply made in the course or furtherance of business.

This narrow reading did not align with the wide language of Section 2(17) of the CGST Act. The definition of “business” includes trade, commerce, manufacture, profession, vocation, adventure, wager or any similar activity, whether or not carried out for pecuniary benefit. It also includes activities incidental or ancillary to such activities. The definition does not require volume, frequency, continuity or regularity.

Therefore, a holding company need not be in the business of lending for its guarantee to have a business character. If the guarantee helps the subsidiary obtain finance, supports group commercial operations, and protects the holding company’s investment, it has a clear business connection. On that basis, the corporate guarantee was treated as an activity in the course or furtherance of business.

Classification Follows Supply, Not the Other Way Round

Schedule II of the CGST Act, 2017 played an important but limited role in the analysis. It does not independently create a taxable supply. Its function is to classify an activity as a supply of goods or a supply of services after the activity first qualifies as “supply” under Section 7 of the CGST Act. Therefore, the starting point remained Section 7(1)(c) read with Schedule I, not Schedule II by itself.

Once the corporate guarantee was found capable of falling within Schedule I as a supply between related persons in the course or furtherance of business, Entry 5(e) of Schedule II became relevant for classification. This entry treats an agreement to do an act, refrain from an act, or tolerate an act or situation as a supply of service. A corporate guarantee involves a legal undertaking by the holding company to discharge the subsidiary’s liability if default occurs. On that basis, it could be classified as a supply of service.

The definition of “recipient” under Section 2(93) also supported this conclusion. Where no consideration is payable for a supply of service, the recipient is the person to whom the service is rendered. The subsidiary may not be a direct contracting party between the holding company and the bank, but the credit support is rendered for its benefit. Therefore, the subsidiary could be treated as the recipient of the service.

Collateral Arguments Cannot Override the GST Scheme

The petitioners also sought to characterise the corporate guarantee as an actionable claim or as a shareholder activity. The purpose of this argument was to take the transaction outside the GST net, particularly by invoking the concept of actionable claim and the exclusionary framework of Schedule III.

This argument did not succeed. Section 2(1) of the CGST Act adopts the meaning of “actionable claim” from Section 3 of the Transfer of Property Act, 1882. A corporate guarantee is not a transferable claim to an unsecured debt or a beneficial interest in movable property. It is a contingent and secondary obligation undertaken by a surety. The distinction between pledge and guarantee was also material. A pledge involves the bailment of goods as security, whereas a guarantee involves a promise to discharge another person’s liability in case of default.

The shareholder-activity argument, based on transfer-pricing principles and the Organisation for Economic Co-operation and Development (OECD) materials, also could not control the GST analysis. GST has to be applied according to its own statutory language. Where the CGST Act treats certain supplies between related persons as taxable even without consideration, income-tax or transfer-pricing concepts cannot be used to narrow that statutory scheme.

Continuing Obligation Is Not Always a Continuous Supply

Another important question was whether a corporate guarantee should be treated as a continuous supply of services. Section 2(33) of the CGST Act defines “continuous supply of services” as a supply provided continuously or on a recurrent basis under a contract for a period exceeding three months, with periodic payment obligations.

A corporate guarantee may remain in force for several years and create a continuing legal obligation for the guarantor. However, that alone does not make it a continuous supply of services. Where the guarantee is issued without consideration, there are no periodic payment obligations. Therefore, the guarantee cannot be brought within the definition of continuous supply merely because it continues over time.

At the same time, annual valuation was not rejected altogether. Section 13, which deals with the time of supply of services, may become relevant where ordinary invoice or payment-based rules do not neatly apply. The expression “per annum” in Rule 28(2) was therefore understood with reference to the guarantee exposure actually subsisting during the relevant year. It cannot be applied mechanically to the original guarantee amount after the exposure has been reduced by repayment or other adjustments.

A Difficult Value Can Justify a Special Valuation Rule

The valuation challenge was central to the case. Rule 28 addresses the valuation of supplies between distinct or related persons. Rule 28(2), inserted with effect from 26.10.2023, specifically addresses corporate guarantee services supplied to a related person located in India, where a corporate guarantee is given to a bank or financial institution on behalf of the recipient. The rule values such supply at one per cent of the guarantee amount offered per annum, or the actual consideration, whichever is higher. The words “per annum” were inserted by Notification No.12/2024-Central Tax dated 10.07.2024, with effect from 26.10.2023.

The statutory basis for this valuation rule lies in Section 15 of the CGST Act. Section 15(1) adopts transaction value where the supplier and recipient are not related, and price is the sole consideration. That ordinary provision does not apply in related-party cases, particularly where no fee is charged for the guarantee. Section 15(4) therefore permits valuation in the prescribed manner where value cannot be determined under Section 15(1). Section 15(5), through a non-obstante clause, also permits special valuation for notified supplies. Section 164 supplies the general rule-making power.

On this framework, Rule 28(2) was upheld as a valid valuation mechanism. Reliance was placed on the Supreme Court’s reasoning in Directorate General of Goods and Services Tax Intelligence v. Gameskraft Technologies (P.) Ltd., [2026] 186 taxmann.com 1232 (SC). Corporate guarantees can be difficult to value because there may be no open market value, no actual commission, or different commercial rates in different circumstances. Therefore, prescribing a special valuation rule for such transactions was within the rule-making power.

A Valuation Rule Cannot Ignore the Real Value

Rule 28(2) was upheld as a valuation mechanism, but not in its full literal harshness. The difficulty arose from the expression “whichever is higher”. If applied strictly, this expression would require valuation at one per cent of the guarantee amount even where the actual commission charged between the parties was lower. The petitioners pointed out that in commercial practice, guarantee commission may sometimes be 0.25% or 0.30%, and a compulsory 1% value could therefore become excessive.

The principle in Wipro Ltd. v. Assistant Collector of Customs, (2015) 14 SCC 161 , became important. The Supreme Court had recognised that a notional or uniform valuation method cannot be forced where the actual value is ascertainable. A legal fiction may assist valuation where real value is unavailable, but it becomes arbitrary if it ignores real value despite its availability. The Gujarat High Court also drew support from Munjaal Manishbhai Bhatt v. Union of India, 2022 (5) TMI 397, where a fixed one-third deduction towards land value under GST was read down when the actual land value could be ascertained.

On this basis, Rule 28(2) was not struck down completely. The one per cent benchmark may still operate where actual consideration is absent or cannot be properly determined. However, the words “whichever is higher” were read down because they prevented the taxpayer from relying on actual lower consideration. This is one of the most practical parts of the judgment. The valuation rule survives, but its arbitrary edge has been removed.

A Later Valuation Rule Cannot Burden Closed Commercial Decisions

The next important issue was whether Rule 28(2), inserted with effect from 26.10.2023, could be applied to corporate guarantees furnished before that date. Many guarantees in the batch were executed before the insertion of Rule 28(2), and some were even older than the GST regime itself.

The principles on retrospective and retroactive taxation became relevant. A taxing provision may, in appropriate cases, operate retrospectively or affect existing arrangements. However, such power is not unlimited. If a later provision creates an unexpected tax burden on past transactions and seriously disturbs settled commercial arrangements, it must still satisfy the tests of fairness, reasonableness and constitutional validity under Articles 14 and 19(1)(g).

On this basis, GST levy under Rule 28(2) on corporate guarantees furnished before 26.10.2023 was held unconstitutional. Taxpayers structured their affairs under the law as it existed at the relevant time, while the special valuation machinery came into force only from 26.10.2023. Applying that machinery to earlier guarantees would be harsh and unfair. However, where such guarantees continue after 26.10.2023, GST may apply prospectively from that date.

Circulars Must Follow the Law, Not Expand It

The petitioners also questioned CBIC Circular No.204/16/2023-GST dated 27.10.2023 and Circular No.225/19/2024-GST dated 11.07.2024. The role of such circulars is limited. They may explain the statutory scheme, guide field officers, and bring administrative uniformity, but they cannot become an independent source of levy.

This distinction matters greatly in tax administration. A circular cannot override the CGST Act, the Rules, or the binding interpretation given by the Court. Once the expression “ whichever is higher” in Rule 28(2) was read down, and the levy on guarantees furnished before 26.10.2023 was held impermissible, the circulars could operate only within those limits.

Accordingly, the circulars were set aside to the extent they were inconsistent with the judgment. The Revenue, however, was left free to issue fresh circulars or administrative instructions consistent with the legal position laid down by the Court.

A Debatable Tax Position Is Not Suppression

Section 74 was another important part of the controversy. This provision applies where tax has not been paid, short-paid, erroneously refunded, or input tax credit has been wrongly availed or utilised by reason of fraud, wilful misstatement or suppression of facts to evade tax. Because Section 74 carries serious consequences, including higher penalties, it cannot be invoked merely because the Department disagrees with the taxpayer’s interpretation.

Corporate guarantee taxability was a genuinely complex issue. The petitioners proceeded on the view that GST was not payable because no consideration was charged. The Department adopted a different interpretation by relying on Section 7, Schedule I, Section 15, Rule 28(2), and the legal character of guarantees under the Contract Act. Such a dispute over the correct meaning and application of the law cannot automatically be converted into fraud, wilful misstatement or suppression of facts.

The principles in Uniworth Textiles Ltd. v. Commissioner of Central Excise, Raipur, (2013) 9 SCC 753, Pushpam Pharmaceuticals Co. v. Collector of Central Excise, 1995 Supp (3) SCC 462, and Collector of Central Excise v. H.M.M. Ltd., 1995 Supp (3) SCC 322 were relevant. These decisions explain that suppression requires deliberate withholding of material facts with intent to evade tax. A bona fide legal position in a debatable interpretational matter is not enough. On this reasoning, the Section 74 notices and order could not survive.

Taxability Survives, but Fairness Controls Its Reach

The judgment draws a careful balance between revenue protection and statutory fairness. Corporate guarantees cannot be treated as completely outside GST merely because no separate fee or commission is charged. At the same time, Rule 28(2) cannot be applied in a harsh, mechanical or retroactive manner.

The result is clear and practical. The taxability framework has been recognised, but arbitrary valuation, demands for the period before 26.10.2023, and routine invocation of Section 74 have been restrained. Corporate guarantee transactions must now be examined under GST, but only through fair valuation, proper timing and legally sustainable proceedings.

The Roadmap Is Taxable, Fair and Prospective

Torrent Power is likely to guide future GST disputes on corporate guarantees because it gives structure to an area that had remained uncertain for years. It recognises the wide reach of Schedule I in related-party transactions and accepts the need for a special valuation mechanism where open market value is difficult to identify.

At the same time, the judgment places clear limits on that framework. Valuation must remain reasonable. A later rule cannot unfairly burden past guarantees. Actual lower consideration cannot be ignored merely because a deeming formula exists. A genuine interpretational dispute also cannot be converted into suppression for invoking Section 74.

The enduring rule is therefore balanced. A corporate guarantee may fall within GST, but the tax must be imposed through fair valuation, prospective application and proper proceedings.