Taxability of CGs upheld, 1% deemed valuation held prospective and ‘whichever is higher’ in rule 28(2) of the CGST Rules read down – Gujarat High Court

In brief

In one of the first comprehensive judgements¹ , the Gujarat High Court upheld levy of goods and services tax (GST) on corporate guarantees (CGs) furnished by holding companies to a lender bank for providing financial assistance to its subsidiaries. The court held that furnishing of a CG constitutes a supply of service under section 7(1)(c) read with Schedule I, Entry 2 of the Central Goods and Service Tax Act, 2017 (CGST Act), with the subsidiary being the recipient to whom the benefit ultimately accrues. Furthermore, execution of CG was held to create a legally enforceable obligation and as constituting ‘agreeing to do an act’ under Entry 5(e) of Schedule II of the CGST Act. The court also held that furnishing a CG can constitute ‘business’, under section 2(17) of the CGST Act, even where providing guarantees is not the principal business activity of the holding company.

While upholding the Constitutional validity of section 15(4) of the CGST Act and rule 28(2) of the Central Goods and Services Tax Rules, 2017 (CGST Rules), the court has read down the expression ‘whichever is higher’ in rule 28(2) of the CGST Rules as being arbitrary and violative of Articles 14 and 19(1)(g) of the Constitution of India. The court held that the value may be deemed as 1% or based on actual consideration, as applicable. The court further held that levy under rule 28(2) of the CGST Rules retroactively for periods prior to 26 October 2023 is violative of Articles 14 and 19(1)(g) of the Constitution of India. 

Furthermore, the court, while quashing orders issued under section 74 of the CGST Act, held that since the taxability of CGs involved a genuine and disputed interpretation of the GST provisions, mere non-payment or non-declaration did not establish the necessary malafide intent to invoke section 74 of the CGST Act