GST Suspension, Cancellation and Section 74: How Bonafide Buyers Are Being Punished for the Defaults of Others
Since the introduction of GST in 2017, we have been repeatedly told that the law is based on self‑assessment, seamless credit and system‑driven checks. In paper, the Act and Rules are full of safeguards. In reality, especially in Karnataka, what we see in the field is completely different – a pattern where innocent and bonafide buyers are the first and easiest targets, while the real defaulting suppliers comfortably escape action for years.
A very typical pattern has now emerged. The State GST wing, after some so‑called “data analysis”, prepares a list of “non‑existent” or defaulting suppliers. Along with that list, they compile the names of buyers who have purchased from these suppliers. Without any meaningful field verification or collection of corroborative material, this list is casually forwarded to the Central GST side with a simple instruction: “take action, suspend registrations, initiate section 74 proceedings”. On the Central side, instead of independent application of mind, many officers simply act on this list as if it is gospel truth. They do not verify the returns of suppliers and buyers, they do not look at e‑way bills, they do not look at transport documents, weighment slips or bank statements. They do not even compare data available in the GST portal itself.
Based only on this “list”, the Central officer issues a suspension order to the buyer, almost as a routine. In many cases, the suspension order is accompanied by a very short notice, giving hardly one or two weeks to reply. In some cases, the notice is not properly served at all or is drafted so vaguely that a common taxpayer does not even understand what exactly is the allegation. Before the buyer can collect documents, meet a professional and frame a proper reply, the officer is ready with a cancellation order. Registration is cancelled, often with retrospective effect, and sometimes straight from the date of registration itself. The order simply says “purchased from non‑existent dealer”, “fake invoice”, “bill without supply”, nothing more.
One of my own clients is a very typical example. He is a scrap dealer, a small trader, filing monthly GSTR‑1 and GSTR‑3B returns consistently and paying tax regularly. He also has TDS credit lying in his electronic cash ledger, which itself shows that other registered persons have treated him as genuine and deducted tax under GST provisions. He has valid tax invoices, e‑way bills, weighment slips, transport records and bank statements for all his main purchases. However, his registration was suspended and then cancelled purely on the allegation that his supplier is a non‑existent/defaulting dealer. The cancellation was made retrospective, without recording any proper reasons under section 29(2) of the Act. No discussion on his documents, no discussion on actual movement of goods, no discussion on his tax payments.
As usual, he filed revocation application within time. Again, there was a routine show cause notice, then a cryptic order rejecting revocation, and then the First Appellate Authority mechanically confirmed the cancellation order. The FAA did not call for the full records, did not examine the GST portal data, did not test the genuineness of the buyer’s business. It is as if once the tag “non‑existent supplier” is attached somewhere, the buyer automatically becomes guilty, without any requirement of proof.
For a small buyer, this chain is not just a legal problem. It is a question of survival. Once registration is suspended, his business comes to a halt. Trade partners do not want to deal with a suspended or cancelled GSTIN. He cannot issue tax invoices, cannot collect GST, cannot file returns. On top of that he has to spend money to file appeal before the FAA, and then again find a lawyer and spend more to file a writ before the High Court. Court litigation and writ practice are not cheap for a small dealer, especially when the original issue is not even a case of tax evasion, but only a wrong assumption drawn from a “list” prepared somewhere in the back office.
What is more disturbing is that this approach is contrary to the law itself and to many judgments of the Supreme Court and various High Courts. Time and again the courts have clearly said that genuine purchasers with valid invoices, proven movement of goods and payment through banking channels should not be penalised for the default of suppliers. The law has enough provisions to deal with fake registration, fake invoicing and non‑existent dealers directly. There are special powers of inspection, search, seizure, arrest and prosecution. There are separate penalty provisions. There is section 74 specifically to deal with tax evasion by fraud, wilful misstatement or suppression. If a supplier is genuinely involved in fake billing or if he is not existing at his place of business, the first responsibility of the department is to act against that supplier, not to shift the entire burden immediately on the buyer.
But what we see in practice is the exact opposite. From 2017 till date, in many cases the department has not taken even one effective action to trace and punish the actual defaulting supplier. The easiest route is to sit in office, download a data sheet, find buyers who are physically available and traceable, and then start issuing notices and show cause notices under section 74, suspension orders and cancellation orders under section 29. Scrap dealers are the favourite targets. Officers know that many scrap dealers frequently travel to procure materials from different cities, yards and auction points. When they are not found at the registered place during a casual visit, the conclusion is immediately drawn: “non‑existent”, “no business at place”. That becomes the foundation for cancellation. There is hardly any serious effort to verify whether the dealer was actually on a business trip, whether his books are maintained, whether transactions shown in returns are supported by e‑way bills and transport documents.
From my own experience starting from the Sales Tax days of 1982 through VAT and now GST, scrap dealers have always been part of the tax base. Under VAT also there were chain transactions, multiple buying and selling, different locations, and limited formal accounting knowledge at the trader level. Yet, tax was collected and paid. Under GST too, nearly sixty percent of scrap dealers are doing business properly and paying GST, TDS, TCS and Income Tax regularly. Real difficulty is that many of them are not well educated in accounts or law. They depend on tax professionals and consultants for guidance and compliance. The law is complex; the portal is not simple; circulars and notifications keep changing. In such a situation, it is not just unfair but cruel to treat these small buyers as masterminds of fake billing merely because their supplier (who was once validly registered) later becomes non‑compliant.
Another important angle is the quality of adjudication. Many officers, especially at the assessment and adjudication level, are technically highly qualified – doctors, engineers, general graduates – but may not have deep grounding in accountancy, tax law and commercial practice. This itself is not a fault; anyone can learn the law. But in reality, many of them have not updated themselves on the latest amendments, circulars and binding judgments. They mechanically reproduce phrases like “fake invoice”, “non‑existent dealer”, “bill without supply”, and blindly follow a template order. They rarely appreciate how a genuine scrap business operates on the ground, how payments are made, how weights and grades are determined, what kind of documentation is practically maintained. This disconnect between ground reality and adjudication is the root cause of many unjust orders today.
At the same time, enforcement wings – especially when they target scrap dealers – often work on the assumption that “scrap means fraud”. They leave aside other sectors and business establishments and focus heavily on scrap, as if GST law is only meant for scrap traders. But GST is a comprehensive tax across goods and services. If the law is to be applied fairly, enforcement must be sector‑neutral and evidence‑based, not stereotype‑based. Singling out scrap dealers as a class and treating them as suspect by default is nothing but discrimination and misuse of authority.
If we look at the provisions carefully, the law itself supports bonafide buyers. Section 16 lays down conditions for input tax credit – possession of tax invoice, receipt of goods or services, tax paid to government, and filing of returns. If a buyer has fulfilled all these conditions, and the supplier has also shown the outward supply in his return and paid tax, there is hardly any legal basis to deny credit or brand the transaction as fake. Section 29(2) provides for cancellation of registration, but it requires reasons to be recorded and a reasonable opportunity of being heard. Section 30 gives a remedy of revocation, again with a clear requirement of hearing before rejection. Section 74 is a serious penal provision meant for fraud and willful misstatement, not for casual imposition of tax on every mismatch. In spite of this framework, many orders are being passed in a manner that treats every buyer in the chain as guilty until proved innocent.
Courts have started pushing back against this pattern. In Instakart Services Pvt. Ltd. v. Union of India, the Karnataka High Court held that a bona fide purchaser cannot be denied ITC merely because the selling dealer failed to deposit the tax, and read down section 16(2)(c) and Rule 36(4) to protect genuine buyers who have fulfilled all other conditions. The Court made it clear that when the buyer has invoice, proof of receipt of goods and banking trail, the department must proceed against the defaulting seller instead of punishing the buyer.
Similarly, in M/s Haradiya Enterprises v. Superintendent of Central Tax, the Karnataka High Court held that suspending a dealer’s registration under Rule 21(b) pending enquiry is “too harsh”, and directed that suspension be revoked, leaving it open to the department to complete the enquiry and pass a proper speaking order. This judgment is directly relevant where small buyers are put under suspension merely because there is some report against their supplier, without any independent verification of the buyer’s conduct.
Across the country, different High Courts have taken a similar view. Several judgments have held that ITC cannot be denied to a genuine recipient merely on account of supplier’s default, and that adverse action requires evidence of collusion or bogus transactions, not just a data mismatch. Recent decisions have also questioned purely mechanical retrospective cancellations, insisting that if returns were filed and tax paid for certain periods, registration cannot be simply wiped out for those periods without specific reasons on record.
What is the result of all this? Bonafide buyers who have already complied with the law once – by paying tax, filing returns, maintaining documents – are forced to fight one more round: reply to notices, collect additional documents, attend hearings (often multiple dates), file appeals within short limitation periods and then finally approach the High Court when everything else fails. For a small trader, the cost of litigation itself becomes a penalty, irrespective of whether he ultimately wins in court. This is not how a facilitative tax system is supposed to function.
There is also a wider systemic cost. When traders see that department is quick to act against the compliant and visible taxpayers, but slow to move against the real defaulters, confidence in the system declines. Honest taxpayers begin to feel that being honest is itself risky because you are “easy to catch”. This attitude will harm revenue in the long run much more than any short‑term recovery made through arbitrary demands and cancellations.
The need of the hour is a clear and uniform approach. First, any allegation of “non‑existent dealer” or “fake invoice” must be based on proper field enquiry, documentary evidence and independent application of mind by the jurisdictional officer. Second, action should primarily focus on the defaulting supplier. Only where there is concrete evidence of collusion or knowledge on the part of the buyer should heavy provisions like section 74, suspension and cancellation under section 29 be invoked against the buyer. Third, show cause notices and suspension orders must be clear, detailed and accompanied by a proper opportunity of hearing. The recent judgments of various High Courts, including Karnataka, have already reminded the department that mechanical suspension and cancellation are not acceptable. Fourth, appellate authorities must function as true fact‑finding and law‑applying bodies, not as mere rubber stamps of the lower authority.
For professionals advising clients, especially in the scrap trade, it is important to insist on complete documentation – invoices, e‑way bills, weighment slips, transport details, bank payments – and to maintain a clean trail of each transaction. It is equally important to educate clients about their rights: the right to a proper show cause notice, the right to be heard, the right to obtain copies of adverse reports and to rebut them with evidence, and the right to challenge arbitrary orders before appellate forums and constitutional courts. At the same time, we must also continue to remind the administration, through representations and writ petitions, that the GST law was never meant to be a weapon against bonafide buyers, but a framework to tax supply of goods and services fairly and efficiently.
Unless these ground realities are acknowledged and corrected, the present pattern will continue: circulars and judgments saying one thing, field practices doing another, and the genuine buyer standing in the middle, forced to choose between closing his business or spending his precious resources on endless litigation. That is not the promise with which GST was introduced, and it is high time the system corrects course.
Suggested way to show footnotes:
1. Instakart Services Pvt. Ltd. v. Union of India, Karnataka High Court, order dated 09.02.2026 (ITC to bona fide buyer; Section 16(2)(c) read down in application).
2. M/s Haradiya Enterprises v. Superintendent of Central Tax, WP No. 33165/2024 (T‑RES), Karnataka High Court, order dated 17.12.2024 (suspension pending enquiry “too harsh”).
3. Various HC rulings compiled in “How Mechanical Cancellation and ITC Denial Punish Bona Fide Taxpayers”, TaxGuru, 17.01.2026 (survey of Gauhati, Delhi, etc.)
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