Corporate Guarantees Not a Taxable Supply Under CGST Act - Rule 28(2) Struck Down | Gujarat HC

The Gujarat High Court has delivered a landmark ruling that corporate guarantees issued by holding companies to their subsidiaries do not amount to a taxable supply under the Central Goods and Services Tax Act, 2017. By striking down Rule 28(2) of the CGST Rules and the related circulars, the Court has removed the GST liability that many corporate groups were facing.

Background & Facts

The Dispute

The petitioners, a consortium of corporate entities that had furnished guarantees to their wholly-owned subsidiaries, challenged the levy of GST on such guarantees. They contended that the guarantees do not satisfy the statutory definition of "supply" under Section 7 of the CGST Act, 2017 and that Rule 28(2) of the CGST Rules, together with Section 15(4) of the Act, were unconstitutional. The respondents, the Union of India and the Central Board of Indirect Taxes and Customs (CBIC), argued that the guarantees fell within the deeming fiction of Section 7(1)(aa) and were therefore taxable.

Key Facts

• The petitioners filed a group of Special Civil Applications (SCAs) numbered 12175, 12179, 12492, 13176, 14252, 14454, 15076, 15082, 15084, 6085, 9622, 11560, and 764 of 2024-2026.
• Circulars issued by CBIC on 27-Oct-2023 and 11-Jul-2024 sought to tax corporate guarantees under Rule 28(2).
• The Bombay High Court decision in M/s D.P. Jain & Co. Infrastructure Private Limited v. Union of India dated 06-May-2026 was heavily relied upon by both sides.
• The petitioners relied on earlier Gujarat High Court judgment Gujarat Chamber of Commerce and Industry v. Union of India (2025) 139 GSTR 390.
• The matter was heard before a Division Bench comprising Hon’ble Mr. Justice A.S. Supehia and Hon’ble Ms. Justice Vaibhavi D. Nanavati.

Procedural History

• 14-Aug-2026: Judgment pronounced (reserved on 15-Jul-2026).
• 2024-2025: Petitioners filed the above-listed SCAs seeking declaration that Rule 28(2) and Section 15(4) are ultra vires.
• The Union of India, through the CBIC, defended the taxability of corporate guarantees and the validity of the circulars.
• Multiple written submissions were filed, referencing the Bombay High Court decision of 06-May-2026 and various provisions of the CGST Act and Rules.

Parties' Positions

• Petitioners: Asserted that a corporate guarantee is a contingent promise without consideration, does not involve an actual supply of goods or services, and therefore falls outside the ambit of Section 7. They emphasized the need for a specific legislative provision to deem such guarantees as supply.
• Respondents: Maintained that the deeming provision in Section 7(1)(aa) automatically brings intra-group guarantees within the definition of supply, and that the GST Council’s circulars correctly interpreted the law.

Relief Sought

The petitioners sought a declaration that:

1. Rule 28(2) of the CGST Rules, 2017, is ultra vires the Constitution.
2. Section 15(4) of the CGST Act, as applied to corporate guarantees, is unconstitutional.
3. The CBIC circulars dated 27-Oct-2023 and 11-Jul-2024 are invalid.
4. No GST liability should arise on corporate guarantees furnished by the petitioners.

The Legal Issue

What is the correct interpretation of Section 7 of the CGST Act, 2017 and the related deeming provision Section 7(1)(aa) with respect to corporate guarantees, and whether Rule 28(2) of the CGST Rules and the CBIC circulars taxing such guarantees are constitutionally valid?

Arguments Presented

For the Petitioners

• Contended that a corporate guarantee does not satisfy the four essential ingredients of a supply under Section 7: (a) supply, (b) service, (c) to a related party, and (d) in the course or furtherance of business.
• Relied on Gujarat Chamber of Commerce and Industry v. Union of India (2025) and the Supreme Court’s principle in The Member, Board of Revenue v. Arthur Paul Benthall (AIR 1956 SC 35) that differing statutory expressions must be given their distinct meanings.
• Emphasised that the deeming fiction in Section 7(1)(aa) was introduced only for transactions expressly covered by the legislature, and corporate guarantees are not among them.
• Submitted that Schedule I Entry 2 requires an identifiable supply of goods or services, which a mere promise to pay does not provide.

For the Respondents

• Argued that the purpose of Section 7(1)(aa) is to prevent tax avoidance by intra-group transactions and that corporate guarantees fall within its sweep.
• Cited the Bombay High Court’s D.P. Jain decision, interpreting the deeming provision broadly to include contingent obligations.
• Maintained that the circulars were issued under the authority of the GST Council and reflected a legitimate policy choice.

The Court's Analysis

The Court began by examining the textual matrix of Section 7. It noted that the definition of “supply” is inclusive but conditioned on the existence of an actual transaction involving consideration and the performance of an activity in the course or furtherance of business. The Court observed:

"The corporate guarantee furnished by the petitioners will not constitute a taxable supply of service since as per the provision of Section 7 of the CGST Act, to constitute a taxable supply of service, there has to be, (a) supply; (b) services; (c) to related party; and (d) in course or furtherance of business." The Court then dissected the deeming provision Section 7(1)(aa), emphasizing that it was introduced by the Finance Act, 2021 to address specific intra-group transactions that the legislature intended to tax. It held that the absence of an express provision for corporate guarantees meant that the legislature had not intended to bring them within the tax net. Reference was made to the principle of noscitur a sociis, concluding that the term “service” in Section 2(102) cannot be read in isolation from Section 7. The Court stressed that a mere promise, without consideration and without an actual economic activity, cannot be transformed into a supply merely by invoking Schedule I. The Court further examined the constitutional challenge, finding that imposing GST on corporate guarantees would violate Articles 14, 19(1)(g) and 265 of the Constitution because it would be arbitrary and lack a rational nexus to the tax base. Distinguishing the Bombay High Court’s D.P. Jain decision, the Court held that the latter dealt with a different factual matrix involving fee-based services, whereas the present case concerned gratuitous guarantees. Consequently, the Court declared Rule 28(2) of the CGST Rules, 2017, Section 15(4) of the CGST Act, and the CBIC circulars dated 27-Oct-2023 and 11-Jul-2024 ultra vires and of no force.

The Verdict

The petitioners succeeded. The Gujarat High Court set aside Rule 28(2) of the CGST Rules, declared Section 15(4) of the CGST Act ultra vires, and invalidated the CBIC circulars of 27 Oct 2023 and 11 Jul 2024. No GST liability will arise on corporate guarantees furnished by the petitioners. The Court directed the Revenue to cease any demand notices and to delete the disputed entries from the GST returns of the petitioners.

What This Means For Similar Cases

GST on Intra-Group Guarantees

• Practitioners must reassess any GST assessments issued on corporate guarantees and advise clients that such guarantees are not taxable supplies unless a specific legislative amendment is made.
• Tax audits should focus on actual consideration-based services rather than contingent promises.

Interpretation of Deeming Provisions

• The decision underscores that Section 7(1)(aa) cannot be expansively applied; it requires a clear legislative intent to deem a transaction as supply.
• Counsel should scrutinise the statutory language and avoid relying on broad policy arguments when the statute is silent.

Constitutional Safeguards in Tax Law

• The judgment reinforces that tax provisions must satisfy the principles of equality and non-arbitrariness under Articles 14, 19(1)(g) and 265.

• Future challenges to tax provisions will likely invoke this reasoning, demanding a rational nexus between the tax and the activity.

• Actionable takeaways:

  • Review all intra-group guarantee arrangements for GST exposure.
  • File remedial applications under Section 73/74 of the CGST Act where GST has been wrongly demanded.
  • Advise clients to obtain explicit legislative clarification before structuring guarantee-based transactions.