The dispute surrounding denial of Input Tax Credit (ITC) to bona fide purchasers under Section 16(2)(c) of the CGST Act, 2017 has become one of the most significant constitutional and commercial controversies in the GST regime. At the heart of the issue lies a fundamental question: can a genuine purchaser, who has already paid GST to the supplier and complied with every statutory obligation within his control, be deprived of ITC merely because the supplier failed to deposit tax with the Government?
A close examination of the statutory framework reveals that the GST law itself contains a comprehensive mechanism to deal with supplier defaults through Section 76 of the CGST Act. Yet, instead of invoking this provision against the actual wrongdoer — the defaulting supplier — tax authorities have increasingly shifted the burden onto innocent purchasers by denying ITC. This approach raises serious constitutional, doctrinal, and administrative concerns.
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The controversy assumes greater significance because the GST regime is built upon the principle of seamless credit flow. ITC is not a concession but an integral feature of value-added taxation designed to avoid cascading tax effects. Section 16(2)(c), however, conditions the purchaser’s entitlement to ITC on actual payment of tax by the supplier to the Government. The difficulty is that the purchaser has neither legal authority nor technological capability to independently verify whether the supplier has discharged this obligation.
This creates a structural imbalance within the GST framework. A purchaser may receive goods or services, obtain a valid tax invoice, make payment including GST through banking channels, file returns correctly, and still face ITC denial solely because the supplier defaulted. In effect, the purchaser suffers financial consequences for an act committed entirely by another party.
The statutory architecture of the CGST Act, however, suggests that Parliament never intended such an outcome. Section 76 specifically addresses situations where tax is collected from another person but not deposited with the Government. The provision contains a sweeping non-obstante clause overriding all contrary provisions of the Act and mandates that every person who has collected tax and failed to remit it must forthwith pay the amount to the Government. It also empowers authorities to initiate adjudication proceedings, impose interest and penalties, and recover the dues directly from the defaulting supplier.
The breadth of Section 76 is particularly important. It applies to “every person” who has collected tax and failed to pay it. The provision does not distinguish between State GST or Central GST jurisdictions, nor does it restrict action based on administrative boundaries. This interpretation received judicial support from the Jharkhand High Court in R.K. Transport & Constructions Ltd. v. State of Jharkhand (2025), where the Court held that authorities cannot avoid taking action under Section 76 merely because the supplier is registered under another jurisdiction.
In that case, the purchaser had paid GST to the supplier for transportation services, but the supplier failed to file GSTR-1 returns and did not deposit the tax. Consequently, the purchaser was denied ITC. When the purchaser approached authorities seeking action against the supplier, the Department attempted to avoid responsibility by citing jurisdictional limitations. Rejecting this stand, the High Court categorically ruled that Section 76 empowers authorities to proceed against every person who collects tax and fails to deposit it, irrespective of registration details or jurisdictional boundaries.
The Court further emphasized that the authorities were duty-bound to initiate proceedings against the supplier and could not remain passive while penalizing the purchaser. This judgment significantly strengthens the argument that Section 76 is intended to be the primary recovery mechanism in cases of supplier default.
Another critical feature of Section 76 lies in sub-sections (10) and (11), which recognize that the person who ultimately bears the incidence of tax — typically the purchaser — is entitled to refund of any surplus recovered from the supplier. This provision reflects clear legislative recognition that the purchaser is the victim of the supplier’s default rather than the wrongdoer.
The implication is substantial. If the statute itself contemplates recovery from the supplier and restoration to the purchaser, denying ITC to the purchaser effectively results in double recovery for the Government. First, the purchaser loses ITC despite having paid tax to the supplier, and second, authorities retain the power to recover the same amount from the supplier under Section 76. Such an outcome appears inconsistent with both statutory intent and constitutional fairness.
The constitutional challenge to Section 16(2)(c) has already received attention from several High Courts. Courts such as the Gauhati High Court in National Plasto Moulding, the Tripura High Court in Sahil Enterprises, and the Karnataka High Court in Instakart Services Pvt. Ltd. adopted the “reading down” approach to protect bona fide purchasers from arbitrary ITC denial. These judgments recognized that purchasers cannot be expected to ensure supplier compliance when they lack access to the relevant information.
However, these decisions largely focused on constitutional principles such as impossibility of compliance, arbitrariness, and violation of Articles 14 and 19(1)(g), without deeply examining the independent statutory remedy available under Section 76. The existence of this provision substantially strengthens the argument for reading down Section 16(2)(c), because it demonstrates that the GST framework already contains a direct remedy against the actual defaulter.
The debate gained a different dimension with the Gujarat High Court’s decision in Maruti Enterprises v. Union of India (2026), where the constitutional validity of Section 16(2)(c) was upheld. The Court emphasized revenue protection and observed that the GST system’s destination-based structure necessitates strict compliance safeguards. Nevertheless, even while upholding the provision, the Court acknowledged the hardships faced by genuine purchasers and urged the Government to establish technology-driven tracking mechanisms and focus recovery efforts on erring suppliers.
Importantly, the Gujarat High Court did not examine Section 76, the refund mechanism under Section 76(10), the implications of Sections 149 and 159, or the informational asymmetry created by the Department’s exclusive access to technological tools such as BIFA (Business Intelligence and Fraud Analytics). These omissions leave substantial room for future constitutional and statutory reconsideration.
The informational imbalance under GST is one of the strongest arguments against strict enforcement of Section 16(2)(c). The Department possesses extensive technological capabilities through GSTN systems, BIFA analytics, and data-driven fraud detection tools. Authorities can monitor return mismatches, identify suspicious entities, trace network linkages, and analyze supplier risk profiles in real time. Purchasers, however, have no comparable access.
This asymmetry becomes more problematic because the Government has failed to operationalize statutory safeguards specifically designed to protect purchasers. Section 149 of the CGST Act contemplated a GST compliance rating mechanism that would publicly indicate the reliability and compliance track record of registered suppliers. Nearly nine years after enactment, the provision remains dormant.
Similarly, Section 159 empowers authorities to publish details of defaulters in the public interest, thereby enabling market participants to avoid risky suppliers. Yet this mechanism too has largely remained unused. As a result, purchasers are expected to assess supplier reliability without access to the very information that the statute intended to provide.
The constitutional implications are significant. A system where the Department possesses complete information while purchasers remain effectively blindfolded creates an uneven playing field. Penalizing purchasers for failing to detect risks visible only to the Government raises serious concerns under Article 14 of the Constitution.
The burden of proof framework under Section 155 of the CGST Act also requires careful interpretation. While the provision places the burden of proving ITC eligibility on the claimant, this burden cannot extend to proving facts exclusively within the supplier’s knowledge or the Government’s database systems. Once the purchaser establishes possession of valid invoices, receipt of goods or services, payment through banking channels, and filing of returns, the initial burden stands discharged.
If authorities allege collusion, fraud, or sham transactions, the burden shifts to the Department to establish such allegations through positive evidence. Mere supplier default or portal mismatch cannot automatically justify denial of ITC to a bona fide purchaser.
The controversy surrounding Section 16(2)(c) is therefore not merely about revenue collection. It concerns the broader constitutional principles governing fairness, proportionality, and administrative accountability. The GST law itself provides the Government with a powerful mechanism under Section 76 to recover tax from defaulting suppliers. The continuing preference for denying ITC to innocent purchasers despite this mechanism raises questions about whether the statutory framework is being applied in a manner consistent with constitutional guarantees.
A balanced resolution may ultimately require both judicial and legislative intervention. Operationalizing supplier compliance ratings under Section 149, actively publishing defaulter information under Section 159, providing purchasers with meaningful risk indicators, and mandating prior exhaustion of remedies under Section 76 before denying ITC could create a more equitable framework.
The evolving jurisprudence suggests that courts are increasingly conscious of the difficulties faced by genuine purchasers. While divergent judicial views continue to exist, the growing recognition of Section 76 as a complete recovery mechanism may significantly influence future constitutional challenges and shape the next phase of GST litigation on ITC denial.
