Section 16(2)(c) CGST Act Upheld — ITC Is a Statutory Concession, Not a Vested Right; Purchasing Dealer Must Prove Supplier Paid Tax

The Hon'ble High Court of Gujarat at Ahmedabad (Division Bench) in Maruti Enterprise Through Its Authorized Partner, Jigneshbhai Bharatbhai Tarpara v. Union of India & Ors. [R/Special Civil Application No. 18080 of 2023 (lead matter)] dated May 01, 2026 held that Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 is neither ultra vires the Constitution of India nor liable to be read down, as the provision is clear, unambiguous and self-explanatory. The Court further held that ITC is a statutory concession and not a fundamental, vested, or absolute right, and that the entitlement to ITC is intrinsically linked to the factum of actual payment of tax by the supplier to the Government. While declining to interfere with the provision, the Court directed the Government to undertake a comprehensive re-evaluation and implement real-time technology-driven mechanisms to protect genuine purchasers from defaults by their suppliers.

FACTS OF THE CASE

The Petitioner, Maruti Enterprise through its Authorized Partner Jigneshbhai Bharatbhai Tarpara, along with a large group of similarly situated registered taxpayers under the Central Goods and Services Tax Act, 2017 (hereinafter "the CGST Act"), filed a batch of writ petitions before the High Court of Gujarat at Ahmedabad, raising a common constitutional challenge to the validity of Section 16(2)(c) of the CGST Act.

The Petitioners were registered dealers who had duly purchased goods from their respective registered suppliers. In each case, the Petitioners had received the supplies, possessed valid tax invoices issued by registered suppliers, had the inward supply details auto-populated in their GSTR-2A and GSTR-2B statements on the GST portal, and had paid the consideration inclusive of GST to the suppliers. The Petitioners had satisfied all conditions under Section 16(2) of the CGST Act pertaining to possession of tax invoices, receipt of goods/services, and filing of returns under Section 39.

However, in each of these cases, the concerned supplier had failed to deposit the tax so collected with the Government — either by not filing GSTR-3B or by filing GSTR-3B without actual payment. As a consequence, the Revenue authorities denied Input Tax Credit (ITC) to the Petitioners under Section 16(2)(c) of the CGST Act, which makes ITC conditional upon the actual payment of tax charged in respect of such supply to the Government by the supplier.

The Petitioners challenged Section 16(2)(c) of the CGST Act as being arbitrary, ultra vires and violative of Articles 14, 19(1)(g), 265 and 300A of the Constitution of India. In the alternative, they prayed that the provision be read down so as to apply only to transactions that are fraudulent, collusive or involving connivance between the purchasing dealer and the supplier, thereby excluding bona fide purchasers who had exercised due diligence and had no control over the supplier's compliance. Being aggrieved by the denial of ITC solely on account of the supplier's default — despite having fulfilled all obligations cast upon them under the statute — the Petitioners filed the present group of writ petitions challenging the constitutional validity of the impugned provision.

ISSUE

Whether Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, insofar as it conditions the entitlement of a bona fide purchasing dealer to Input Tax Credit upon the actual payment of tax by the supplier to the Government, is arbitrary, ultra vires and violative of Articles 14, 19(1)(g), 265 and 300A of the Constitution of India, or is liable to be read down to exclude genuine purchasers who have no control over the supplier's compliance.

HELD BY THE COURT

The Hon'ble High Court of Gujarat at Ahmedabad in R/Special Civil Application No. 18080 of 2023 held that:

The Court held that the Statement of Objects and Reasons of the CGST Bill, 2017 emphatically provides that ITC is to be made available "in respect of taxes paid," thereby establishing an intrinsic connection between the availment of ITC and the factum of taxes actually paid. The Court observed that Section 16(2)(c) of the CGST Act, read in its plain and unambiguous terms, is a clear, self-explanatory provision and its literal interpretation does not give rise to any constitutional or legal infirmity. The Court further held that the underlying legislative intent is that the Government cannot be deprived of revenue on account of illegal or defaulting conduct by the supplier, and this intent is consistent with the overall scheme of the CGST Act.

The Court held that the provision of Section 16(2)(c) of the CGST Act cannot be equated with Section 9(2)(g) of the Delhi Value Added Tax Act, 2004 which was read down by the Delhi High Court in On Quest Merchandising India (P.) Ltd. v. Government of NCT of Delhi, as affirmed by the Supreme Court in Commissioner of Trade & Tax, Delhi v. Arise India Ltd. and approved in Commissioner Trade & Tax, Delhi v. Shanti Kiran India (P.) Ltd. The Court opined that the DVAT Act lacks equivalent provisions corresponding to Section 41(2), Section 155 and Rule 37A of the CGST Act, 2017, which together form a materially different and more comprehensive statutory framework. The Court further observed that the Tripura High Court in Sahil Enterprises v. Union of India had incorrectly applied the reasoning of On Quest Merchandising (supra) to Section 16(2)(c) of the CGST Act without adequately considering the interplay of Sections 41, 53 and Rule 37A of the CGST Act.

The Court held that the GST regime, being destination-based, operates in a materially different manner from the erstwhile VAT regime where ITC was confined within the originating State. Under the GST framework, ITC crosses State boundaries in inter-State transactions through the IGST mechanism, where the originating State is obligated under Section 53 of the CGST Act to transfer the CGST/SGST component to the destination State. The Court observed that any reading down of Section 16(2)(c) would trigger cascading fiscal consequences, as the originating State would be compelled to transfer amounts it never actually received, causing revenue loss of several crores in each tax period, thereby rendering the entire GST scheme unworkable.

The Court held that Section 41 of the CGST Act, as substituted by the Finance Act, 2022, adequately addresses the concerns of purchasing dealers. Section 41(2) mandates that if a supplier fails to pay the tax, the purchasing dealer must reverse the ITC availed along with applicable interest; however, once the supplier pays the tax, the purchasing dealer is entitled to re-avail the reversed credit under the proviso to Section 41(2) read with Rule 37A of the CGST Rules, 2017. The Court observed that Rule 37A, introduced on December 26, 2022, further grants a grace period allowing recipients to retain ITC until September 30 of the following financial year, with the reversal deadline extended to November 30. The Court thus held that the statutory mechanism does not permanently deprive the purchasing dealer of ITC — the credit is restored upon payment of tax into the Government treasury — and that mere delay or hardship cannot constitute a valid ground for reading down Section 16(2)(c).

The Court held that Section 155 of the CGST Act, which places the burden of proving ITC eligibility upon the person claiming it, is a significant provision that was not considered either by the Delhi High Court or the Tripura High Court. The Court observed that the expression "eligible" in Section 155 cannot be construed as dependent upon a unilateral claim by the purchaser alone; rather, eligibility has a direct nexus with the actual payment of tax by the supplier. The Court opined that all clauses of Section 16(2), from (a) to (d), are to be read conjointly and not independently, and the purchasing dealer must satisfy all conditions including clause (c) to establish entitlement to ITC. The Court further held that ITC is a form of concession extended to dealers under the statutory scheme — not a fundamental, vested, or absolute right — and that the conditions of such concession are to be strictly complied with as per trite law laid down by the Supreme Court.

The Court, while declining to read down Section 16(2)(c) or to declare it ultra vires the Constitution, acknowledged that a balanced approach is necessary by invoking the principle enunciated by the European Court of Justice in Axel Kittel & Belgian State (C-439/04) and Belgian State v. Recolta Recycling SPRL (C-440/04), under which ITC denial is justified only if the recipient knew or ought to have known that the purchase was connected with fraudulent evasion of tax. The Court, however, strongly observed that there is a pressing need for legislative amendments or clarifications, and directed the Government to implement a robust, technology-driven real-time tracking mechanism enabling verification of supplier payments against specific invoices, so as to insulate bona fide recipients from vendor defaults. The Court urged the Government to take prompt action for recovery of tax from erring suppliers, rather than compelling purchasing dealers to seek cumbersome alternate remedies, and listed all writ petitions to be decided on merits with individual rights left open.

RELEVANT SECTIONS

Section 16(2)(c), Central Goods and Services Tax Act, 2017 — "subject to the provisions of section 41 or section 43A, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply."

Section 41(2), Central Goods and Services Tax Act, 2017 — mandates reversal of ITC by the recipient if the supplier fails to deposit tax, with proviso permitting re-availment upon payment by supplier.

Rule 37A, Central Goods and Services Tax Rules, 2017 — prescribes the mechanism for reversal and re-availment of ITC where the supplier has not filed GSTR-3B, with a grace period up to September 30 of the following financial year and reversal deadline of November 30.

Section 53, Central Goods and Services Tax Act, 2017 — mandates transfer of the central tax component utilised by an inter-State supplier to the integrated tax account for apportionment to the destination State.

Section 155, Central Goods and Services Tax Act, 2017 — "Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person."

Section 9(1), Central Goods and Services Tax Act, 2017 — levy of tax on supply of goods and services, payable by the taxable person i.e. the supplier.

Article 14, Constitution of India — right to equality and equal protection of laws.

Articles 19(1)(g), 265 and 300A, Constitution of India — right to carry on trade and profession; no tax levied except by authority of law; no deprivation of property save by authority of law.

PARI MATERIA / CASES REFERRED

On Quest Merchandising India (P.) Ltd. v. Government of NCT of Delhi, [2017] 87 [2018] 10 GSTL 182 (Delhi High Court) — The Delhi High Court read down Section 9(2)(g) of the DVAT Act, holding that a bona fide purchasing dealer who had transacted with a validly registered selling dealer against proper tax invoices could not be denied ITC merely because the selling dealer failed to deposit tax with the Government, as the purchasing dealer had no means to monitor the selling dealer's compliance and could not be compelled to do the impossible.

Commissioner of Trade & Tax, Delhi v. Arise India Ltd., 2022 (60) GSTL 215 (Supreme Court) — The Supreme Court dismissed the SLP challenging the On Quest Merchandising decision, thereby affirming the Delhi High Court's reading down of Section 9(2)(g) of the DVAT Act.

Commissioner Trade & Tax, Delhi v. Shanti Kiran India (P.) Ltd., [2025] 179 (Supreme Court) — The Supreme Court approved the principle in On Quest Merchandising, while examining the provision of Section 9(2)(g) of the DVAT Act, in the context of the absence of a reliable statutory mechanism for a purchasing dealer to verify the selling dealer's payment.

State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd., (2023) 18 SCC 809 (Supreme Court) — The Supreme Court set aside the Karnataka High Court judgment in Tallam Apparels which had followed On Quest Merchandising, holding that the burden of proof under Section 70 of the KVAT Act, 2003 cannot be discharged merely by production of invoices or payment through cheque, and that the issue of burden of proof was not before the Delhi High Court when it interpreted Section 9(2)(g) of the DVAT Act.

Sahil Enterprises v. Union of India (Tripura High Court) — The Tripura High Court applied the doctrine of reading down to Section 16(2)(c) of the CGST Act following On Quest Merchandising; distinguished by the Gujarat High Court on the ground that the Tripura Court did not adequately consider Sections 41 and 53 of the CGST Act and Rule 37A.

M. Trade Links v. Union of India, 2024 SCC OnLine (Ker.) 2744 (Kerala High Court) — The Kerala High Court lucidly explained the operation of ITC under the GST regime including the IGST mechanism for inter-State supplies and held Section 16(2)(c) to be constitutional.

Authorized Officer, Central Bank of India v. Shanmugavelu, (2024) 6 SCC 641 (Supreme Court) — Authoritatively laid down the principles governing the doctrine of reading down, holding that harshness of a provision is no reason to read it down if its plain meaning is unambiguous and perfectly valid.

Axel Kittel v. Belgian State (C-439/04) and Belgian State v. Recolta Recycling SPRL (C-440/04), Court of Justice of the European Union, Third Chamber, June 06, 2006 — The ECJ ruled that VAT deductions can be denied only if the participant knew or ought to have known that the transaction was connected with fraud; denial is not justified where the taxable person did not and could not have known of such fraud.

ALD Automotive Private Limited v. Commercial Tax Officer, (2019) 13 SC 225 (Supreme Court) — Held that ITC is in the nature of a benefit/concession extended to dealers under the statutory scheme, which can be received only as per the scheme of the statute, and conditions of such concession must be strictly complied with.

Commissioner of Sales Tax, Uttar Pradesh v. Modi Sugar Mills Limited, AIR 1961 SC 1047 (Supreme Court, Constitution Bench) — Held that in interpreting a taxing statute, equitable considerations are entirely out of place; the Court must look squarely at the words of the statute and cannot imply anything not expressed nor supply any assumed deficiency.

Arpit Pravinbhai Shah v. Assistant Commissioner of Income Tax, (2026) 182 (Gujarat High Court) — Distinguished by the Revenue; the Court had held that TDS deducted but not deposited by the employer did not disentitle the assessee from credit, as Section 205 of the Income Tax Act, 1961 expressly bars direct demand on the assessee to that extent — a protection absent in the CGST Act.