GST on Corporate Guarantees: High Court Ruling Explained

The High Court published a decision in the case between D.P. Jain & Co. Infrastructure Pvt. Ltd. and the Union of India on whether GST applies to corporate guarantees issued by a company on behalf of its related entities without charging any consideration, particularly for periods before Rule 28 of the CGST Rules was amended. In addition to clarifying the applicable GST rules, the Court also explained how a corporate guarantee differs from a bank guarantee.

Facts of the Case and Court's Ruling

Between 2020 and 2022, the company engaged in the construction of national and state highways, providing corporate guarantees to the State Bank of India and the Bank of Maharashtra to secure term loans granted to its subsidiary companies that executed the relevant projects. The guarantees explicitly stated that the company received no security fee, commission, or other consideration.

In its decision, the High Court noted that a corporate guarantee serves as an internal business support arrangement rather than independent commercial services. More specifically, the Court explained that while banks issue guarantees as part of their commercial business for a fee, a corporate guarantee is typically provided by a parent or related company to support the financial obligations of a subsidiary or group entity. The Court also added that a corporate guarantee is a contingent contract, meaning it is only enforceable if the borrower defaults. If no default occurs, the guarantee remains only a potential obligation. 

The Court also held that under previous Supreme Court rulings, corporate guarantees provided without consideration are not taxable under the service tax regime. Since no fee or payment was involved, the Court ruled that GST did not apply and cancelled both the summons and the tax notice issued to the company. Notably, the ruling leaves one broader question unresolved: how corporate guarantees should be classified and taxed under GST going forward.

Conclusion

The High Court's decision provides significant relief to taxable persons facing investigations by the Indian Tax Authorities over intra-group corporate guarantees and similar arrangements, including intellectual property or trademark use between parent and subsidiary companies where no clear consideration is charged. At the same time, the ruling is a reminder to carefully review existing corporate guarantee arrangements and ensure documentation clearly reflects whether any commission or consideration is being charged.

Source: KPMG, EY