• Dated 14^th February, 2025

High Court Stays GST Levy on Corporate Guarante

Fact of the Case:

In a recent ruling, the Bombay High Court dealt with a critical issue related to the Goods and Services Tax (GST) on corporate guarantees provided by holding companies to their subsidiary companies. The petitioner sought to challenge the imposition of GST on such corporate guarantees, arguing that such guarantees do not qualify as a taxable service under Section 9 of the Central Goods and Services Tax Act (CGST Act).

Petitioner's Contention:

The petition was filed in response to Circular No. 204/16/2023-GST, issued on 27th October 2023, which proposed to levy tax on corporate guarantees extended by holding companies to their subsidiaries. The core question was whether such guarantees fall within the ambit of "supply" or "supply of service" as defined under GST law. The petitioner challenges the constitutionality of the GST circular imposing tax on corporate guarantees on the grounds that it violates fundamental rights guaranteed by the Indian Constitution. The petitioners argue that the circular infringes upon Article 14 (Right to Equality), as it may create discriminatory taxation between businesses based on their involvement in corporate guarantee arrangements. They further contend that it violates Article 19(1)(g) (Freedom of Trade and Business) by imposing an unreasonable restriction on their ability to conduct business freely, especially since corporate guarantees are not typically considered a taxable service. Additionally, the petition asserts that the circular violates Article 265 (No Tax Without Authority of Law), as it imposes a tax without clear legislative backing or authorization, arguing that such taxation should only be levied by law passed by the legislature and not through administrative circulars.

Held:

The Bombay High Court granted an interim order in favor of the petitioner, staying the operation of the circular that imposed GST on corporate guarantees. Here's the following of what the court decided:

1. The Court acknowledged that the issue was a recurring one and noted that several other High Courts, including Delhi, Telangana, and Punjab & Haryana, had already stayed the effect and operation of this circular. The Bombay High Court, therefore, stayed the operation of the circular until further orders, specifically in relation to corporate guarantees issued by holding companies to their subsidiaries.
2. The respondents (Union of India) were granted 6 weeks to file an affidavit-in-reply to address the challenge to the circular and the petitioner's argument that providing corporate guarantees does not constitute a "supply of service" under the CGST Act.
3. The Court also noted that the issue of GST on corporate guarantees was a significant matter, and until a final decision was made, no coercive actions would be taken against the petitioner, as per stays granted by other High Courts.

Comment:

The crux of the issue lies in whether a corporate guarantee provided by a holding company to its subsidiary qualifies as a "supply" under the CGST Act. The petitioners have argued that such guarantees do not meet the definition of "supply of service" and should not be subject to GST. This argument is significant because, traditionally, corporate guarantees are seen as financial instruments rather than taxable services.The case primarily concerns Section 9 of the CGST Act, which governs the levy and collection of GST on supply of goods and services. Under this section, the supply of goods and services is taxable unless exempted by law. The circular in question sought to classify corporate guarantees as taxable services, triggering the current legal challenge. The Court's decision to stay the operation of the circular imposing GST on corporate guarantees provides immediate relief to holding companies. This stay, coupled with the fact that multiple other High Courts have similarly stayed the circular, indicates a growing legal trend of questioning the taxation of corporate guarantees under GST. This case could serve as a critical tax planning point for holding companies and multinational groups engaged in intra-group financing and guarantees.

Author:Aindrila Ghosh.

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