The Supreme Court has upheld one of the key safeguards built into the Goods and Services Tax regime, ruling that a purchaser cannot claim Input Tax Credit (ITC) unless the supplier has actually deposited the corresponding tax with the government.
A Bench comprising Justice Sanjay Kumar and Justice Sanjeev Sachdeva dismissed multiple petitions challenging the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax (CGST) Act, 2017. In doing so, the Court endorsed the Gujarat High Court’s reasoning and affirmed that the statutory condition linking ITC to the supplier’s tax payment is legally valid.
The Bench observed that the High Court had rightly concluded that there were no grounds to either invalidate or dilute the provision.
“The High Court was fully justified in holding that no grounds were made out to declare Section 16(2)(c) of the CGST Act as unconstitutional or read down the provisions thereof. We find ourselves in complete and respectful agreement with the views expressed by the High Court of Gujarat and affirm and uphold the impugned judgment.”
Challenge to the Provision
The petitions questioned Section 16(2)(c) on the ground that it unfairly penalizes genuine buyers for defaults committed by suppliers. According to the petitioners, purchasers have no practical control over whether a supplier ultimately deposits the GST collected from them, making the denial of ITC arbitrary and contrary to constitutional guarantees under Articles 14, 19(1)(g), 265 and 300A.
As an alternative, the petitioners urged the courts to interpret the provision narrowly so that ITC would be denied only in cases involving fraud, collusion or deliberate connivance between buyers and sellers. They argued that honest purchasers should not lose credit because of the independent failure of their vendors.
Gujarat High Court’s View Approved
The Gujarat High Court had rejected these arguments, holding that Section 16(2)(c), when read alongside Sections 41 and 53 of the CGST Act, forms part of a broader statutory framework that balances the interests of taxpayers and revenue authorities.
The High Court emphasized that ITC is not an unconditional entitlement but a benefit created by legislation, making it subject to the conditions imposed by Parliament.
It observed:
“It is well settled that ITC is not a constitutional or vested right, but a statutory concession, subject to the conditions and restrictions prescribed under the Act. Where the statute provides for reversal and re-availment of credit, the same cannot be characterised as double taxation so as to invalidate the provision.”
The Court also clarified that the government’s separate recovery proceedings against a defaulting supplier do not eliminate the statutory requirement imposed on the purchaser. While authorities may recover unpaid tax from the supplier, buyers are free to pursue their own remedies against defaulting vendors.
According to the High Court, the absence of a specific statutory mechanism enabling purchasers to recover losses from suppliers does not render Section 16(2)(c) unconstitutional.
Need for Better Protection for Genuine Buyers
Although it upheld the validity of the provision, the Gujarat High Court acknowledged the practical difficulties faced by bona fide purchasers and urged the government to strengthen the GST framework through policy and technological improvements.
The Court recommended introducing a real-time digital system that allows purchasers to verify whether tax corresponding to a particular invoice has actually been deposited by the supplier. Such a mechanism, it noted, would significantly reduce disputes and shield compliant businesses from the consequences of vendor defaults.
The High Court also stressed the need for faster recovery proceedings against errant suppliers and suggested legislative amendments or clarifications to reduce the disproportionate burden currently placed on genuine purchasers.
It cautioned that without stronger oversight and technology-driven verification, dishonest suppliers could exploit the system to the detriment of both the public revenue and compliant businesses.
