One of the most common objections raised during GST audits and investigations is that a taxpayer “should not have done business with a supplier whose GST registration was cancelled, especially where the cancellation was on account of fraud.” In many cases, this objection is raised mechanically, without examining what the law actually provides.
This article examines whether GST law prohibits doing business with a cancelled GSTIN holder and how such persons should be treated for GST purposes.
No Prohibition on Doing Business under GST Law
At the outset, it is important to note that neither the CGST Act, 2017 nor the CGST Rules contain any provision that prohibits a registered taxpayer from doing business with a person whose GST registration has been cancelled.
GST law regulates taxability, registration, invoicing, and input tax credit. It does not regulate or restrict commercial relationships between parties. Therefore, the mere act of entering into or continuing business transactions with a cancelled GSTIN holder is not illegal per se.
What the law restricts is how such transactions are to be treated for GST purposes, not whether they can exist at all.
Effect of Cancellation of GST Registration
Once a GST registration is cancelled under section 29 of the CGST Act, the person ceases to be a “registered person” from the effective date of cancellation.
Consequently:
1. The person cannot charge GST on supplies made after the cancellation date
2. The person cannot issue a tax invoice under GST
3. The person cannot collect tax in any manner as GST
From the effective date of cancellation onwards, such person is to be treated as an unregistered person under GST law.
Treatment of Supplies after Cancellation
If supplies are made after the effective date of cancellation, the correct legal position is as follows:
1. The supply is treated as a supply made by an unregistered person
2. No GST should be charged by the supplier
3. The recipient cannot claim input tax credit
4. Reverse Charge Mechanism (RCM) applies only if the supply is specifically notified, which in most cases it is not
Therefore, the illegality does not arise from the transaction itself, but from incorrect tax treatment, such as charging GST or availing ITC when the supplier is no longer registered.
Transactions Prior to Cancellation Date
Where supplies were made before the effective date of cancellation, and the supplier was holding a valid GST registration at that time:
1. Such transactions remain legally valid
2. ITC cannot be denied merely because the registration was cancelled subsequently
3. Retrospective cancellation cannot automatically invalidate completed transactions unless fraud or collusion is established
This principle has been repeatedly upheld by courts, which have held that a bona fide purchaser cannot be penalized for subsequent defaults of the supplier.
Even where GST registration is cancelled on grounds of fraud, the law does not impose an automatic embargo on the recipient from doing business with such person.
However, recipient-side consequences may arise only if:
1. ITC is claimed on invoices issued after cancellation
2. The recipient had knowledge of fake billing or was part of a collusive arrangement
3. Due diligence was completely absent
In the absence of these factors, the recipient cannot be penalized solely on the ground that the supplier’s GST registration stood cancelled.
Departmental Objections – Where They Go Wrong
In many cases, departmental authorities loosely state that “business should not have been done with a cancelled GSTIN holder.” This statement has no statutory backing.
The correct question should be:
1. Was GST charged after cancellation?
2. Was ITC claimed incorrectly?
3. Was the supplier treated as registered when he was not?
If the answers are in the negative, the objection fails in law.
Conclusion
GST law does not prohibit doing business with a person whose GST registration has been cancelled. What it prohibits is treating such person as a registered supplier after cancellation, accepting GST invoices from them, or availing input tax credit.
Once registration is cancelled, the supplier is to be treated as an unregistered person, and transactions must be structured accordingly. Any demand or objection beyond this framework is not supported by the GST statute.
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