Ahmedabad: Gujarat High Court on Friday ruled that GST can be charged on corporate guarantees, but struck down a key part of how the tax is calculated. The court found the phrase “whichever is higher” in the valuation rule—which set the value at either 1% per annum of the guarantee amount or actual consideration, to be arbitrary and unconstitutional.Several corporate houses had challenged the govt’s move to levy GST retrospectively on corporate guarantees given by holding companies to their subsidiaries. They argued that for a taxable supply of service to exist, there must be an actual supply of services to a related party in the course of business.They contended that supply means an act of supplying something, but when a corporate guarantee is issued, nothing is actually supplied—it is merely a promise to pay at a future date, contingent on an event that may or may not occur. Such a contingent promise, they argued, cannot amount to a supply on the date it is made.The high court upheld the constitutional validity of rule 28(2) of the CGST Rules, which permits GST on corporate guarantees, but ruled that the tax cannot be applied retroactively. However, guarantees that remained in effect even after the rules came into force would continue to be taxable.
