Bombay High Court has stayed the effect and operation of the GST Circular relating to corporate guarantee on a petition filed by Vedanta. Earlier, the High Courts of Telangana and Punjab & Haryana issued similar orders, while the Delhi High Court granted a stay that no coercive action will be taken against the Petitioner in case a final assessment order is passed or a demand is created.

“We grant time to the Respondents (Central Governments and others) to file their affidavit-in-reply to the above Writ Petition in so far as it lays a challenge to the circular dated October 27, 2023 and also to the extent that the Petitioner (Vedanta Limited) seeks a declaration that the activity of a holding company providing a corporate guarantee to a subsidiary is not in the nature of ‘supply’ and/or ‘supply of service’ taxable under Section 9 of the CGST Act,” a division bench of Justices Firdosh P Pooniwalla and B P Colabawalla said. Also, it allowed the revision of the petition to challenge the retrospective amendment in the GST circular.

In its petition, the company sought a declaration that the activity of a holding company providing a corporate guarantee to its subsidiary is not a ‘supply’ and/or ‘supply of service’ taxable under GST law. It also sought a declaration that the tax department be restrained from collecting tax on the activity of providing corporate guarantees to subsidiary companies.

The petition also prayed that the impugned circular dated October 27, 2023, under which the tax is sought to be levied and collected, be declared unconstitutional and ultra vires. Since the notice dated February 1, 2024, was issued to the Petitioner seeking certain information in relation to corporate guarantees for the period July 1, 2017, till March 31, 2021, the said notice was also challenged.

The bench noted that Tax Department’s submission that since the Final Audit Report (of the audit conducted) has been issued, it is not pursuing the matter arising out of the letter dated February 1 2024. It was submitted that since the tax department is not pursuing the matter further, nothing would survive in the said writ petition.

Commenting on the ruling, Harpreet Singh, Partner (Indirect Tax) at Deloitte, said: “Companies (particularly those in sectors such as power, real estate, etc.) must take a considered call on whether they should also approach High Courts by tagging along with ongoing cases or discharge tax liability under protest. Also, few companies are taking the position of not paying tax on corporate guarantee and have notified the tax authorities by making adequate disclosures.” 

On October 7, 2023, the GST Council recommended an 18 per cent tax on the parent company’s guarantee to the subsidiary. However, director’s personal guarantee was excluded. Later it was notified and a circular was issued. While the first part of the circular is related to the personal guarantee given by the director, its second part deals with the parent company’s corporate guarantee to its subsidiary for a bank loan. The second part of the circular has been contentious and challenged in various High Courts and, in many cases, has been stayed.