The Gujarat High Court has upheld GST on corporate guarantees but struck down the 1% valuation floor and barred retrospective demands. DSRV India explains what changes, and where Bombay now disagrees.
For most Indian corporate groups, a parent company guarantee is routine paperwork. The holding company signs, the subsidiary borrows at a better rate, and no fee changes hands.
Since October 2023, that routine act has carried a price tag. GST on a deemed value of 1 per cent of the guaranteed amount, every year, under Rule 28(2) of the CGST Rules.
On 14 August 2026, the Gujarat High Court delivered the most comprehensive judgment yet on the subject in Torrent Power Ltd. v. Union of India. It gives something to both sides. The levy survives, but the valuation floor does not, and the retrospective demands fall away. It also sets up a direct collision with the Bombay High Court that only the Supreme Court can now settle.
If your group has guarantees on its books, or a notice in hand, your position just changed in two directions at once. Here is what actually happened and what to do about it.
The Court held that a corporate guarantee given by a holding company for its subsidiary's bank borrowing is a taxable supply of service even without consideration, because Schedule I of the CGST Act deems supplies between related persons taxable without consideration.
The subsidiary, as the ultimate beneficiary, is the recipient. Supporting a subsidiary's finances counts as business, even as a one-off. A guarantee is not an exempt actionable claim, and securing it with a share pledge changes nothing.
If your group already wrestles with valuation of related-party dealings for direct tax purposes, this is the same problem wearing a different hat. Our note on intercompany transactions and dual exposure under transfer pricing and GST explains why a single internal transaction can be tested twice.
The Court struck down the words "whichever is higher" in Rule 28(2) as arbitrary and unconstitutional.
The reasoning is worth understanding, because it is what makes the ruling durable. The GST Council itself acknowledged that arm's length guarantee fees range from 0.5 per cent to 3 per cent. Evidence before the Court showed actual market charges as low as 0.25 to 0.3 per cent. A rigid 1 per cent floor that overrides demonstrated actual pricing, and compounds every year the guarantee subsists, failed the test of Articles 14 and 19(1)(g).
The practical result: where a real fee or commission exists, GST is payable on that actual consideration. The deemed 1 per cent applies only where nothing is charged.
The 1 per cent deemed valuation cannot be applied to periods before Rule 28(2) came into being on 26 October 2023. A retrospective levy of a new tax, the Court held, is harsh, unfair and unconstitutional.
So demands for July 2017 onwards built on the 1 per cent formula fall. The levy runs only from 26 October 2023 for guarantees that continue.
Guarantees for foreign subsidiaries take export-of-service treatment under Circular 225/19/2024, and a show cause notice covering 2017 to 2020 on foreign-subsidiary guarantees was set aside outright.
Before you concede any older period, check the department's own clock as well. Our guide to the GST limitation period for notices and orders sets out the outer limits, and a demand can be bad on limitation even where the substantive point is arguable.
In one matter the department had invoked Section 74, the fraud provision carrying a 100 per cent penalty, for a guarantee executed in February 2012, before GST even existed.
The Court quashed it. Where taxability itself is an interpretational dispute and the facts were known to both sides, non-payment is not wilful suppression.
This is the most reusable part of the judgment. Departments routinely reach for the fraud provision to buy a longer limitation window, and courts routinely take it away. If your notice alleges suppression on a point that is genuinely arguable, read our note on why the fraud allegation in your GST notice may be its weakest link. For periods from FY 2024-25, remember the two-track system has been replaced by the unified provision explained in our guide to Section 74A of the CGST Act.
The Circulars of October 2023 and July 2024 were also set aside to the extent they conflict with the judgment, and excess GST already deposited is to be refunded or adjusted.
Here is what makes this moment genuinely unsettled.
Three months earlier, on 6 May 2026, the Bombay High Court in D P Jain & Co. Infrastructure went further for taxpayers. It held that a corporate guarantee without consideration is not a supply at all, relying on the Supreme Court's service tax era Edelweiss ruling, and quashed the proceedings entirely.
The Gujarat Bench expressly disagreed. Edelweiss, it reasoned, belonged to a law where consideration was built into the very definition of service. GST's Schedule I deliberately taxes related-party supplies without consideration, so the old logic does not carry over.
Two Division Benches, two irreconcilable answers to the threshold question. Taxable on Gujarat's view. Not a supply on Bombay's.
Departmental and taxpayer appeals to the Supreme Court are now a certainty, and a pending service tax appeal on the same theme, DLF Cyber City, may travel with the batch.
For your group the immediate consequence is that your position is jurisdiction-sensitive. Where you are assessed changes which argument leads.
If you have received demands for pre-October 2023 periods, both High Courts now stand against them. Bombay on the threshold question, Gujarat on retrospectivity. These should be contested rather than conceded, and any Section 74 characterisation attacked at the outset. Start with the reply, because that is where the case is actually decided, as set out in our 15-point checklist for replying to a GST show cause notice.
If you charge a guarantee fee, on Gujarat's reading GST applies on your actual fee, not a notional 1 per cent. Groups that paid on the higher deemed value have a refund or adjustment claim worth computing now.
If your subsidiaries enjoy full input tax credit, the July 2024 amendment deems the invoice value to be the taxable value for full-ITC recipients. The issue is largely cash-neutral going forward, provided invoicing and credit flows are disciplined.
If your subsidiaries sit in exempt sectors, power, real estate, alcohol, petroleum, healthcare or education, the levy is a real cost and you are the true stakeholder in the Supreme Court round. Build the guarantee register, quantify exposure year by year on both High Courts' logic, and preserve every position in replies and appeals.
One practical point the judgment throws up. Many of these demands were computed mechanically, applying 1 per cent to the full guaranteed amount for every year, sometimes across periods when no guarantee was live and sometimes on the same facility counted twice.
Before you argue the law, rework the arithmetic. A large share of what looks like a legal dispute turns out to be a computation error, which is the pattern we describe in our guide on understanding and resolving inflated GST tax demands.
With two High Courts in conflict, the forum question matters more than usual.
Where the order was passed without a proper hearing, or the notice never told you what you were answering, the defect is procedural and the arguments set out in our note on natural justice in GST adjudication may get you a faster and cleaner result than a merits appeal.
Where the dispute is squarely on taxability or valuation, the statutory route is the safer one. Our guides to the GST adjudication process and its time limits and to appeals before the GST Appellate Tribunal cover the sequence, and the choice between the two paths is set out in our note on writ versus appeal in tax litigation.
Whichever you choose, plead every ground. With the Supreme Court round coming, a ground abandoned now is a ground you cannot revive later.
Torrent Power does not end the corporate guarantee controversy. It reframes it.
The levy stands in principle but shrinks in practice. Actual consideration over notional floors. Prospective only. Never through the fraud provision. Export-treated for offshore subsidiaries.
With Bombay and Gujarat now in open conflict on whether the transaction is taxable at all, every corporate group should treat its position as jurisdiction-sensitive and time-sliced, and keep every ground alive until the Supreme Court speaks.
Our GST team advises corporate groups on guarantee portfolio exposure mapping, valuation positions under the read-down Rule 28(2), refund and adjustment claims, and defence of demands and Section 74 notices, across adjudication, appeal and writ. We handle this work as part of our wider tax litigation and controversy practice. If your group has guarantees on its books or a notice in hand, speak to us before the next compliance date. Disclaimer: This article is for general information and business awareness only and does not constitute professional or legal advice. It discusses the judgment of the Gujarat High Court dated 14.08.2026 in Torrent Power Ltd. v. Union of India and related developments. The issues are sub judice and appeals to the Supreme Court are anticipated. Statutory provisions, notifications and judicial precedents should be verified as on the date of use, and positions must be tailored to the facts of each matter. For advice on a specific matter, please contact DSRV & Co. LLP.
On the Gujarat High Court's view, yes, because Schedule I deems related-party supplies taxable without consideration. The Bombay High Court has held it is not a supply at all. The conflict is headed to the Supreme Court.
Only where no fee is charged. The Gujarat High Court struck down the "whichever is higher" language, so where an actual fee exists, GST is payable on that fee.
Not on the 1 per cent deemed value. The Court held that applying Rule 28(2) retrospectively amounts to a new levy imposed retrospectively, which is unconstitutional.
The judgment directs refund or adjustment of excess GST deposited. Compute the difference year by year against your actual fee and preserve the claim.
Unlikely where taxability was a genuine interpretational question and the facts were known to the department. The Court quashed exactly such a notice.
Those take export-of-service treatment under Circular 225/19/2024, and a notice covering 2017 to 2020 on foreign-subsidiary guarantees was set aside outright.
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The Gujarat High Court struck down the 1% valuation floor on corporate guarantees and barred retrospective demands. What Torrent Power means for your group.
