Gujarat HC Upholds Constitutionality Of CGST Provision Denying ITC To Buyers If Supplier Fails To Pay Tax

The Gujarat High Court has on Friday upheld the constitutional validity of a GST provision that denies input tax credit to a purchaser if the supplier has not deposited the tax with the government.

The court upheld the validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, holding that entitlement to input tax credit is conditional upon actual payment of tax to the government.

Emphasising that there was no constitutional infirmity in the provision, the court held,

"Thus, where a Court, upon a plain and literal interpretation of a statutory provision, finds that it gives rise to constitutional or legal infirmities, it may resort to the doctrine of reading down. However, in the present case, Section 16(2) (c) of the CGST Act is clear, self-explanatory, and unambiguous. Its plain reading does not give rise to any constitutional or legal infirmity. The underlying intent of the provision is that the Government cannot be deprived of revenue on account of illegal or defaulting conduct on the part of the supplier."

A division bench of Justice A.S. Supehia and Justice Pranav Trivedi delivered the ruling while deciding a batch of over fifty petitions filed by dealers who were denied credit after their suppliers failed to deposit the tax.

The petitioners had argued that this imposes an impossible burden on purchasers who have no statutory means to verify whether the supplier has paid tax and amounts to hostile discrimination, double taxation, and an unreasonable restriction on business.

The court rejected these contentions, holding that the GST framework contains safeguards, including provisions for reversal and re-availment of credit once the supplier pays the tax.

“Thus, the statutory mechanism does not permanently deprive the purchasing dealer of ITC; rather, the credit is restored upon payment of tax into the Government treasury. Mere delay or hardship in availing ITC, therefore, cannot constitute a valid ground for reading down Section 16(2)(c) of the CGST Act”

Distinguishing earlier rulings under the VAT regime, the court said the GST system operates differently, particularly because input tax credit flows across states and is tied to actual tax payment.

It noted that allowing credit without corresponding tax payment would disrupt the interstate settlement mechanism and lead to loss of revenue.

The bench also rejected the argument of double taxation, holding that temporary denial followed by re-availment cannot be treated as taxing the same transaction twice.

On the plea that the law compels the impossible, the court observed that the purchasing dealer is not without recourse and may pursue appropriate remedies against the supplier.

At the same time, the court acknowledged the hardship faced by bona fide purchasers and called for corrective action by the government.

“there is a pressing need for legislative amendments or clarifications to be issued within the GST framework to alleviate the disproportionate financial and administrative burdens currently placed upon purchasers who have an honest claim of ITC”

The court further suggested the introduction of a technology-driven system to enable real-time verification of tax payments by suppliers.

“implement a robust, technology-driven tracking mechanism enabling verification of payments made by suppliers against specific invoices in real time, thereby insulating bona fide recipients from the defaults of their vendors.”

It also called for prompt recovery action against defaulting suppliers, warning against misuse of the system.

“in the absence of stringent oversight, unscrupulous sellers could potentially enrich themselves at the expense of both the public exchequer and honest buyers.”

Having upheld the provision, the court clarified that it was only deciding the constitutional challenge and not the individual disputes, which will now be examined separately on merits.