Bombay HC holds corporate guarantee issued without consideration is not taxable under GST

This Tax Alert summarizes a recent ruling of the Bombay High Court (HC) ^[1] on the taxability of corporate guarantee provided by a company on behalf of its related entity without any consideration, prior to the amendment made in Rule 28 of the Central Goods and Services Tax Rules, 2017 (CGST Rules).

The key observations of the HC are:

• A corporate guarantee, unlike bank guarantee, is given by a corporate to cover its own exposure or exposure of some other related entity to their bank.
• Execution of corporate guarantee is in the nature of contingent contract which becomes enforceable only in the event of a default by primary borrower.
• Under the erstwhile service tax regime, Supreme Court (SC) has held that corporate guarantee given without consideration is not taxable^[2].
• In the present case, since all the guarantees are provided without consideration, the same cannot be said in the nature of supply taxable under Section 9 of the Central Goods and Services Tax Act, 2017 (CGST Act).
• There could be a valid reason administratively, economically etc., which goes in the decision-making process before such Rule is amended. Therefore, prayer of the petitioner for declaring Rule 28(2) ultravires is not sustainable.

Basis above, HC partially allowed the writ petition filed by the petitioner and quashed the proceedings demanding tax on corporate guarantee issued by it on behalf of its subsidiaries.

Comments:

• HC has decided the issue of taxability of supply basis the requirement of consideration under GST law, placing reliance on the SC’s ruling in Edelweiss Financial Services Ltd., which pertained to the service tax regime. It appears that the provisions of Schedule I to the CGST Act may not have been the subject of detailed analysis in the judgment, which specifically treats transactions between related persons made without consideration as a supply.
• While the HC noted that corporate guarantees are issued to cover the issuer’s own exposure and is not the same as bank guarantee, the judgment appears to be silent on an analysis of whether such activity could be characterized as a shareholder activity and, accordingly, fall outside the scope of “supply” under the GST law.

^[1] TS-333-HC(BOM)-2026-GST

^[2] MANU/SC/0648/2023