In the most consequential judgment on corporate guarantee GST since the Bombay High Court's ruling in D.P. Jain & Co. (which had struck down the levy), the Gujarat High Court has upheld the constitutional validity of Rule 28(2) of the CGST Rules and rejected all challenges to the taxability of corporate guarantees between holding companies and their subsidiaries under the GST framework — while simultaneously delivering an important reading-down of the valuation provision that limits its economic impact. The common judgment, by Justice A.S. Supehia and Justice Vaibhavi D. Nanavati in R/Special Civil Application No. 12175 of 2024 and ten connected matters (decided 14.08.2026), expressly disagrees with the Bombay HC's D.P. Jain ruling and holds that the Bombay HC did not lay down the correct law.
The core question — whether a corporate guarantee furnished by a holding company to a bank for the benefit of its subsidiary without any consideration constitutes a taxable supply — was answered in the affirmative. The court accepted the Revenue's foundational argument: Section 7(1)(c) of the CGST Act read with Article 2 of Schedule I deems the supply of goods or services or both between related persons (when made in the course or furtherance of business) to be a taxable supply even without consideration. A holding company and its subsidiary are related persons under the Explanation to Section 15 of the CGST Act. The furnishing of a corporate guarantee is an activity between them in the course of business. The consideration question — which had been the decisive objection under the service tax regime as affirmed by the Supreme Court in Edelweiss Financial Services — is overcome by the Schedule I deeming fiction in GST.
On whether providing a corporate guarantee is "in the course or furtherance of business," the court read the contract of guarantee through the lens of Sections 126, 127, 140 and 145 of the Indian Contract Act. The benefit conferred on the principal debtor (the subsidiary) constitutes valid consideration to the surety (the holding company) under Section 127. Once the surety discharges the guaranteed debt, Section 140 and Section 145 operate to give the surety subrogation rights and an implied indemnity from the subsidiary. This connecting legal framework means that the holding company is not acting purely as a passive or gratuitous shareholder — it is undertaking an economic obligation with legal consequences, which can appropriately be characterised as an activity in the course of business.
The court also rejected the petitioners' contention that corporate guarantees are actionable claims falling under Schedule III and therefore outside the scope of supply. The contractual analysis under Sections 126 to 145 of the Contract Act was found inconsistent with the treatment of a guarantee as a "debt" for purposes of the Transfer of Property Act's definition of actionable claims. The Revenue's characterisation of a corporate guarantee as falling within Entry 5(e) of Schedule II ("agreeing to do an act") was accepted for classification purposes once the supply was traced to Section 7(1)(c) read with Schedule I.
The most practically important part of the ruling is the court's reading-down of Rule 28(2)'s 1% per annum valuation formula. The court held — accepting the Revenue's own construction — that "amount of such guarantee offered" in Rule 28(2) should be read to mean the subsisting guarantee amount in each year, not the original face value of the guarantee repeated annually regardless of repayment. Where a loan is progressively repaid, the guarantee obligation reduces commensurately. For each successive year, Rule 28(2) should be applied to the outstanding guaranteed amount for that year, not the original amount. If the loan is prepaid, no GST accrues for the remaining contractual term. This reading substantially reduces the economic burden of the valuation rule across multi-year guarantees and corrects what the petitioners had characterised as a confiscatory outcome.
The Bombay High Court's contrary ruling in D.P. Jain & Co. Infrastructure Private Limited v. Union of India (decided 06.05.2026) was specifically considered and rejected. The Gujarat HC expressed its disagreement with the Bombay HC's view as not laying down the correct law. Given the now-direct conflict between two HC judgments on the same issue, a Supreme Court resolution appears inevitable. For the present, holding companies in Gujarat that have furnished corporate guarantees for their subsidiaries will need to account for GST under Rule 28(2) on the subsisting guarantee balance each year — and those who have not done so since October 2023 (when the rule was inserted) should take urgent compliance stock of their position.
- 2026-juristway.com-2216-HC(Gujarat)-GST | High Court of Gujarat | R/SCA No. 12175/2024 & connected matters | 14.08.2026