Gujarat HC Strikes Down Mandatory 1% GST Rule on Guarantees
The Gujarat High Court has struck down the mandatory 'whichever is higher' clause in Rule 28(2) of the CGST Rules for corporate guarantees, ruling that documented actual consideration — not a deemed 1% — governs GST valuation. Corporate groups with documented guarantee fees below 1%, and those denied full ITC relief under Notification 12/2024-CT, stand to benefit.
CA Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Legal basis: Rule 28(2) of the CGST Rules, 2017 (inserted by Notification No. 52/2023-Central Tax) — Effective: 26 October 2023. Source: https://taxguru.in/goods-and-service-tax/gst-corporate-guarantees-1-percent-deemed-valuation-struck-mandatory-ceiling.html. Last reviewed by CA Harun Raaj: September 2026.
On 14 August 2026, a Division Bench of the Gujarat High Court delivered a landmark ruling in Torrent Power Ltd v. Union of India (2026:GUJHC:51510-DB), significantly narrowing the mandatory application of the 1% deemed valuation rule under Rule 28(2) of the CGST Rules, 2017 for corporate guarantees. For promoters and corporate groups providing guarantees to related entities, this ruling changes how GST on those guarantees must be computed.
Key point: The Gujarat HC struck down the "whichever is higher" clause in Rule 28(2), holding that documented actual consideration — not a deemed 1% — governs GST valuation on corporate guarantees.
What Is the 1% Corporate Guarantee Rule?
Rule 28 of the CGST Rules, 2017 governs valuation of supplies between related persons. Sub-rule (2), inserted by Notification No. 52/2023-Central Tax (effective 26 October 2023), provided that where a registered person provides a corporate guarantee to a related party, the taxable value shall be 1% of the guaranteed amount per annum, or the actual consideration, whichever is higher.
CBIC clarified the framework via Circular No. 204/16/2023-GST (27 October 2023) and Circular No. 225/19/2024-GST (11 July 2024).
Partial legislative relief pre-dating this ruling: Notification No. 12/2024-Central Tax (effective 10 July 2024) added two provisos to Rule 28(2). First, where the recipient is eligible for full input tax credit, the invoice value declared shall be deemed the open market value — the 1% floor does not apply. For most regular B2B corporate taxpayers (manufacturing, IT services, trading companies), this notification had already removed the mandatory 1% minimum as of July 2024. Second, where the recipient is located outside India, Rule 28(2) does not apply at all.
From October 2023 to July 2024, the 1% floor applied universally. From July 2024, it continued to apply to corporate groups where the recipient had partial or no ITC eligibility — a significant subset including financial sector guarantees, exempt-supply businesses, and partially-restricted entities. The Gujarat HC ruling provides constitutional ground that benefits both categories.
What the Gujarat HC Held
The Division Bench held:
- "Whichever is higher" struck down: This phrase violates Article 14 (arbitrariness) and Article 19(1)(g) (freedom of business) of the Constitution. Where actual, ascertainable consideration exists — even if below 1% — GST applies on that actual consideration, not a deemed 1%.
- Actual consideration governs: If your group charges a documented guarantee fee of 0.25%, 0.35%, or 0.50% supported by board resolution and transfer pricing analysis, that fee is the taxable value.
- Ind AS 24 / TP documentation accepted: GST valuation should align with subsisting loan balances under Ind AS 24 disclosures and arm's-length transfer pricing.
- 1% still valid where gratuitous: Where no consideration exists and value cannot be determined, the 1% deemed value applies. Consider formalising a documented fee.
- Pre-October 2023 notices quashed: Section 74 demands for periods before 26 October 2023 (when Rule 28(2) was inserted) were set aside — no retrospective application.
Who Is Affected?
Practical Steps
- Document the guarantee fee — Board resolution + transfer pricing analysis for any fee below 1%.
- Recalculate GST from 26 October 2023 at actual consideration, not 1%.
- Evaluate refund — File Form RFD-01 within 2 years of overpayment if excess GST was paid at the 1% rate.
- Respond to pending notices — Pre-October 2023 Section 74 demands: cite this ruling in your reply.
- Jurisdiction note — Gujarat HC is binding in Gujarat, persuasive elsewhere. CBIC may appeal. Seek professional advice before amending returns.
This article is for educational purposes only and does not constitute legal or tax advice. For guidance specific to your corporate guarantee arrangements, consult Harun Raaj & Associates.
I'm CA Harun Raaj, Visakhapatnam. If your group provides or receives corporate guarantees and you want your GST valuation reviewed against this ruling, reach out.
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See Also
Frequently Asked Questions
Does the Gujarat HC ruling on corporate guarantees apply across India?
The Gujarat High Court's ruling in Torrent Power Ltd v. Union of India (2026:GUJHC:51510-DB) is legally binding only within Gujarat. Elsewhere in India it carries strong persuasive value until the Supreme Court rules on the matter. CBIC may also file an appeal.
We are a regular trading or manufacturing company with full ITC eligibility. Did the 1% rule under Rule 28(2) ever apply to us?
Yes, but only from 26 October 2023 to 9 July 2024, when Rule 28(2) applied universally. Since 10 July 2024, Notification No. 12/2024-Central Tax had already exempted recipients eligible for full input tax credit from the 1% minimum, deeming the invoice value as open market value.
We provide corporate guarantees at zero fee. Does the 1% deemed valuation still apply?
Yes. Per the Gujarat HC ruling, where no consideration is charged and the value cannot otherwise be determined, the 1% deemed value under Rule 28(2) remains valid. Formalising a documented guarantee fee via board resolution can move the arrangement out of the deemed rate.
We paid GST at 1% on a corporate guarantee for FY 2024-25. Can we claim a refund?
Potentially, if your actual documented consideration was lower than 1% for that period. Refunds can be pursued via Form RFD-01 under Section 54, within the 2-year window from the date of payment. Get professional advice before filing, as jurisdictional exposure varies outside Gujarat.
Does the Gujarat HC ruling affect CBIC Circular No. 225/19/2024-GST?
The ruling limits the circular's application wherever actual, ascertainable consideration exists — GST then applies on that actual consideration rather than the deemed 1%. The circular's deemed-value guidance continues to apply for gratuitous or indeterminate guarantees where no consideration is charged.
When does the 1% rate under Rule 28(2) unambiguously still apply after this ruling?
Only where no actual consideration is charged for the corporate guarantee and the value cannot otherwise be determined. Any documentable, ascertainable consideration — supported by board resolution and transfer pricing analysis — overrides the deemed 1% rate.
We received a Section 74 GST demand for a corporate guarantee period before 26 October 2023. What should we do?
The Gujarat HC ruling quashed Section 74 demands for periods before 26 October 2023, holding there is no retrospective application since Rule 28(2) was only inserted on that date. Cite the ruling 2026:GUJHC:51510-DB in your reply to the notice.
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