The Madurai Bench of the Madras High Court has set aside a GST demand raised concerning the alleged short-payment of GST on bank guarantees issued to its customers and held that the tax department had proceeded directly to issue a show cause notice without first undertaking the statutory scrutiny and investigation contemplated under the GST law.
The bench of Justice C. Saravanan directed the authorities to conduct an inspection or investigation under Section 67 of the respective GST enactments and thereafter determine whether there had actually been any leakage of revenue in respect of the guarantees extended by the bank.
The writ petition arose from an order confirming a demand proposed through a Show Cause Notice in Form GST DRC-01 dated 29 September 2025 for the financial year 2021-22. The proceedings were initiated by the Commercial Tax authorities against the bank under Section 73 of the GST Act.
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The petitioner/assessee is a banking company governed by the Banking Regulation Act, 1949 and regulations issued by the Reserve Bank of India. In the course of its banking operations, the bank issued bank guarantees to its customers and paid GST on the commission received for issuing such bank guarantees, treating the transaction as taxable under Section 7 read with Schedule I to the GST Act.
The dispute arose because the Department took the view that the guarantees issued by the bank were, in substance, corporate guarantees. According to the Department, GST was therefore payable at 1% of the total value of the bank guarantees. It was alleged that the bank had consequently suppressed the taxable value in its GSTR-1 returns and paid lesser GST through its monthly GSTR-3B returns.
Before the issuance of the show cause notice, the bank received an intimation under Rule 142(1A) of the CGST Rules, 2017, in Form GST DRC-01A (Part A) on 22 September 2025. The bank submitted its response in Form GST DRC-01A (Part B) on 27 September 2025.
The Department was not satisfied with the response and subsequently issued the DRC-01 show cause notice on 29 September 2025. The bank responded and furnished documents in support of its contention that it had not provided any corporate guarantee. It reiterated the same stand in its subsequent replies dated 29 October 2025 and 30 December 2025.
The bank specifically argued that Rule 28(2) of the GST Rules, inserted by Notification No.52/2023-Central Tax dated 26 October 2023, was not attracted in its case. According to the petitioner, it had no related persons and had not provided any corporate guarantee to a banking company or financial institution on behalf of the recipient.
Consequently, the bank maintained that there was no suppression of taxable value in its GSTR-1, GSTR-3B or annual reconciliation statement in Form GSTR-9C.
The State authorities opposed the writ petition. Their case was that the bank had failed to substantiate its stand with the relevant records and had merely furnished a tabulation, which, according to the Department, was insufficient to establish its claim.
On that basis, the authorities proceeded to confirm the demand proposed in the DRC-01 show cause notice.
The principal issue before the High Court was not merely whether GST was ultimately payable on the guarantees issued by the bank. The Court examined whether the Department had followed the proper statutory machinery before proceeding to determine the alleged tax liability.
Justice C. Saravanan noted that the petitioner had already filed its self-assessment return under Section 59 of the GST enactments. In such circumstances, the authorities were required to undertake scrutiny of the self-assessment return under Section 61.
The Court further observed that, during such scrutiny, the authorities could invoke the machinery provided under Sections 65, 66 and 67, depending upon the circumstances of the case.
The Court found fault with the manner in which the proceedings had been initiated. Instead of first carrying out the statutory exercise to determine whether there was actually any revenue leakage arising from the transactions, the authorities had straightaway proceeded to issue the DRC-01 show cause notice.
The Court held that the exercise undertaken by the Department was unsustainable. Consequently, the impugned order confirming the demand was liable to be quashed.
This observation is significant because the judgment focuses on the procedural discipline required in GST assessment proceedings. The Court did not finally decide that the bank’s guarantees could never attract GST under the corporate guarantee provisions. Instead, it directed the Department to undertake the appropriate investigation and thereafter determine the actual tax position.
Rather than bringing the dispute to an end, the High Court remitted the matter to the GST authorities.
The respondents have been directed to conduct an inspection or investigation under Section 67 and thereafter determine whether there was any leakage of revenue on account of the guarantees extended by the petitioner to its customers.
Thus, the Court has left the substantive question of taxability open for determination after the authorities complete the required factual and statutory exercise.
The Court also addressed the limitation issue arising from the remand.
It directed that the period commencing from the 22 September 2025 intimation until the date of the impugned order, and thereafter until the date on which a copy of the High Court’s order is received, would be excluded for computing the limitation period under Section 73.
This direction ensures that the authorities are not deprived of the statutory period available to them merely because the earlier proceedings have been quashed and the matter has been remitted for fresh investigation.
The High Court also made it clear that, if the authorities decide to issue a fresh notice under Section 73, the petitioner would be entitled to further substantiate its case.
In the meantime, the Court ordered that all recovery proceedings remain in abeyance. The entire exercise has been directed to be completed within six months from the date of receipt of a copy of the High Court’s order.
The High Court considered that the question of whether the guarantees issued by the bank resulted in taxable revenue leakage required proper factual examination. The Department was therefore directed to use the investigative machinery available under Section 67 before determining the tax liability.
The Madurai Bench of the Madras High Court ultimately quashed the impugned GST order dated 31 December 2025 and remitted the matter to the respondents for fresh investigation.
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