Section 16(2)(c) CGST Act: Why Genuine Buyers Are Losing ITC Despite Valid Transactions

Section 16(2)(c) CGST Act: How One Condition Is Killing Bona Fide Taxpayers Despite Genuine Transactions

1. The promise of GST and the problem called section 16(2)(c)

When GST came in 2017, it was sold as a simple value-added tax: pay tax at each stage, take credit of tax paid on your purchases, and the system will ensure that the Government finally gets tax on value addition only. For a normal trader or manufacturer, the basic expectation was: “If I have a proper invoice, I receive the goods, I pay the supplier with GST, and I use the goods in my business, my ITC is safe.”

Section 16(2)(c) adds one more condition: the tax charged in respect of the supply must have been actually paid to the Government by the supplier. On paper this looks logical – the Government wants to ensure it has actually received tax somewhere in the chain. In practice, this one sentence has become a sword hanging over the head of every genuine buyer.

If a supplier collects GST in invoice, uploads the invoice in GSTR-1, but does not pay via GSTR-3B, the department is now very comfortable turning around and saying to the buyer: “Section 16(2)(c) not satisfied, your ITC is ineligible.” This is true even when the buyer has done everything correctly.

2. Maruti Enterprise: Gujarat High Court upholds section 16(2)(c) in full

In Maruti Enterprise Through Its Authorised Partner vs Union of India & Ors (Gujarat High Court, 2026), a batch of taxpayers challenged section 16(2)(c) as unconstitutional.

2.1 What taxpayers argued

They told the Court:

• We have proper tax invoices.
• We have received goods.
• We have paid value plus GST to our suppliers.
• Invoices appear in our GSTR-2B.

But some suppliers did not deposit the tax with Government. The department denied ITC purely on that ground. Taxpayers argued:

• This makes ITC dependent on someone else’s default.
• A buyer cannot possibly check supplier’s GSTR-3B or cash ledger.
• It is practically impossible and violates Article 14, 19, 21 and 300-A.

They wanted section 16(2)(c) to be either struck down or at least read down so that it applies only to fake / collusive cases, not bona fide purchasers.

2.2 What the Gujarat High Court held

The Gujarat High Court rejected the challenge. In essence, it held:

• ITC is not a vested right; it is a statutory concession. Legislature can attach conditions.
• One condition is that “tax must have been actually paid to the Government” by the supplier. This is a deliberate policy choice and not arbitrary on its face.
• Section 16(2)(c) is constitutionally valid. The Court refused to read it down for bona fide buyers.
• Burden of proof is on the recipient under section 155; if you claim ITC, you must prove that all conditions, including 16(2)(c), are met.
• The “impossible to verify” argument was rejected because the law now provides a framework:
  • Section 41 and Rule 37A say that if supplier has not paid by a certain time, recipient must reverse ITC, and can re-avail once tax is actually paid.

In short, Gujarat said: the condition may be harsh, but not unconstitutional; the statute has its own internal mechanism (Rule 37A) to manage supplier default.

This is a hard line: supplier default = ITC at risk, even for bona fide buyers.

3. Rule 41 and Rule 37A: how the law expects ITC to work

Two provisions are now central when we talk about section 16(2)(c): section 41 and Rule 37A.

3.1 Section 41 – provisional ITC and reversal

After the 2022 amendment, section 41 says:

• A registered person can avail ITC on a provisional basis subject to conditions.
• If later it is found that conditions are not fulfilled, such ITC shall be reversed in the manner prescribed.

So, section 41 is the “engine room” for provisional credit and reversal.

3.2 Rule 37A – reversal if supplier defaults

Rule 37A (inserted in 2022) provides the detailed process:

• If the supplier fails to furnish GSTR-3B by 30th September following the financial year in which invoice details were furnished in GSTR-1, the recipient shall reverse ITC taken on those invoices in his GSTR3B for the month of September.
• If the supplier later furnishes GSTR-3B and pays the tax, the recipient can re-avail the ITC in his return.

So, the law’s own design is:

1. Allow credit now (when everything “looks good” in 2B),

2. Force reversal later if supplier does not pay,

3. Allow re-availment when supplier pays.

On paper it looks neat: ITC always tied to actual tax payment somewhere in the chain.

4. The retail reality: how is a buyer supposed to monitor all suppliers?

My practical question: I am a retail dealer buying from multiple distributors—small, medium and company. Every month:

• Purchase with proper invoices,
• Pay consideration plus GST through bank,
• See those invoices reflected in GSTR-2A/2B.

Some distributors do not file GSTR-3B or do not pay tax. As a buyer:

• I do not have access to their payment details.
• I do not know who has paid and who has not.
• I do not know when they will pay the Government.

Under section 16(2)(c) + Rule 37A, the system expects me to:

• Monitor whether supplier paid or not (indirectly, via portal alerts),
• Reverse ITC by September of next year if he did not file 3B,
• Re-avail ITC if and when he pays.

From a desk in Gandhinagar or Delhi, this scheme looks “balanced”. On the shop floor in Mysuru or Guntur, it looks like continuous harassment.

A small retailer with 50 suppliers cannot sit every day checking who filed 3B yesterday, who is delayed, who is in default. Genuine buyers are doing business; they are not running an enforcement agency for the Government.

This is exactly why many professionals, including me, say very openly: section 16(2)(c) in its present form is practically impossible for honest buyers to comply with.

5. How other High Courts and Supreme Court have gone the other way

Gujarat is not the only view. Other courts (and pre-GST Supreme Court) show a completely different approach.

5.1 Tripura High Court – reading down section 16(2)(c)

A recent Tripura High Court ruling (widely discussed by professionals) held that denial of ITC solely due to supplier’s default is unjust for bona fide buyers. The Court said section 16(2)(c) fails to distinguish between honest purchasers and those involved in fake transactions. It effectively read down the application of 16(2)(c) so that:

• Bona fide recipients who have complied with all statutory requirements—proper invoice, receipt of goods, payment via bank, return filing—should not be denied ITC just because supplier failed to deposit tax.

This is exactly the opposite of the Maruti approach in practice, although both recognise section 16(2)(c) textually.

5.2 Gauhati High Court – reading down 16(2) (aa)

Gauhati High Court has read down section 16(2)(aa), holding that ITC cannot be denied to a bona fide buyer merely because supplier failed to upload invoice details in GSTR-1. The Court protected genuine taxpayers by saying:

• where recipient has all documents and has done his part, minor or even serious supplier-side defaults in reporting cannot automatically destroy ITC.

Though this case is on 16(2) (aa), the logic is the same: don’t punish bona fide buyer for supplier’s default.

5.3 Supreme Court (pre-GST) – Shanti Kiran and similar VAT cases

In the VAT regime, the Supreme Court in Commissioner of Trade & Taxes v. Shanti Kiran India (P) Ltd. (Delhi VAT) held that a genuine purchaser cannot be denied input credit where:

• the seller was registered on the date of sale,
• the purchaser had proper tax invoices,
• the goods were received, and
• payment was through bank.

The Court said the department’s remedy is against the defaulting seller, not by punishing a bona fide buyer for someone else’s wrong.

This entire line of thinking is the exact moral opposite of using section 16(2)(c) mechanically against buyers.

6. Section 16(2)(c) and VAT comparison: why buyers feel betrayed

In State VAT, the rule was simple for most States:

• If the selling dealer was registered,
• invoice had proper tax,
• goods were received,
• and payment was made,

the input credit of the buyer was generally not disturbed merely because seller misused funds, unless there was clear collusion.

In GST, section 16(2)(c) turns that comfort upside down. Now, even after the buyer proves the entire transaction under section 155—genuine invoice, receipt of goods, bank payment, returns—department still says:

“We accept your transaction is genuine, but your supplier did not pay tax. Therefore, your ITC fails on 16(2)(c). Pay again.”

This is why I rightly say: section 16(2)(c) is killing bona fide taxpayers. It moves the risk of supplier fraud upstream to the buyer, instead of staying with the person who actually failed to pay.

7. NGTP tags: how the department “chases buyers easily”

NGTP (Non-Genuine Taxable Person) tagging is the perfect companion for section 16(2)(c) misuse.

• Supplier is tagged NGTP by analytics/SOP.
• Department says: “Supplier is non-genuine or defaulting; your supplier has not paid tax.”
• Section 16(2)(c) is invoked to deny ITC to all buyers who dealt with that GSTIN.

As I have seen, NGTP is often based on analytics and one inspection, not always serious evidence. But once the tag sticks, hundreds of buyers become an easy soft target: SCNs, ITC denial, interest and penalty. The real NGTP dealer may be non-traceable, but buyers are sitting in their shops, maintaining books; they are easy to hit.

So, the combination is dangerous:

• Section 16(2)(c) shifts legal risk to buyer.
• Rule 37A allows easy reversal demand.
• NGTP tags give an excuse to label supplier as “bad”.

Together, they create a culture where it is simpler to punish bona fide buyers than to do hard work against defaulting suppliers.

8. How genuine buyers and professionals should respond

I asked a deeper policy question: how can buyers do business without daily anxiety? They cannot be checking every distributor’s payment status every day. The honest answer is: under the present law, some anxiety is built into the system, but there are still ways to reduce the damage and push the law in a fair direction.

8.1 Minimum due diligence and documentation

Advise every client:

• Keep full documentation: invoices, GRNs, stock records, e-way bills, bank trail.
• Deal primarily with suppliers who are regular filers; check GST portal for active status and latest 3B filing once in a while for big vendors.
• Avoid obvious high-risk suppliers offering “too good” rates or wanting cash settlement on the side.

This does not solve 16(2)(c) by itself, but it builds a strong bona fide story for courts which favour buyers.

8.2 Use buyer-friendly judgments in our State

In Karnataka, I have already have Instacart-type rulings saying:

• ITC cannot be denied to bona fide buyer merely because supplier defaulted,
• section 16(2)(c) has to be read down in application to non-genuine cases.

In such States, is:

• “We accept that 16(2)(c) exists, but our High Court has decided that it cannot be used to punish honest buyers. Remedy lies against the supplier. Maruti is Gujarat view; our binding law is different.”

8.3 Push back against mechanical 37A reversals where facts are strong

Where there is clear proof:

• supplier was active and compliant at the time of purchase,
• my buyer is a small trader with limited capacity to monitor,
• there is no collusion,

you can argue that automatic reversal without buyer hearing is unreasonable and contrary to Gauhati/Tripura/Karnataka trends and Supreme Court VAT logic.

8.4 Policy advocacy: why 16(2)(c) needs restructuring

Professionally, we should be honest: section 16(2)(c) as drafted is too wide. It needs at least one of these legislative changes:

• Limit its application to cases where recipient is party to fraud or where transaction is non-genuine.
• Use section 76 (tax collected but not paid to Government) more aggressively against supplier, and treat buyer’s ITC as secure where buyer has met conditions under section 16(2)(a), (b), (d) and can prove transaction under section 155.
• Retain Rule 37A only as a temporary cash-flow management tool, not as a final punishment.

Articles and representations can argue that if the Government itself says “supplier is under obligation to collect and remit tax”, then the real consequence must fall first and firmly on that supplier.

9. Conclusion: law must protect genuine buyers and punish real defaulters

The Gujarat High Court in Maruti Enterprise is right on one narrow point: Parliament can design section 16(2)(c), and the condition is not unconstitutional on its face. But the way it is being applied—with NGTP tags, mechanical 37A reversals, and little focus on real enforcement against defaulting suppliers—means that, in practice, section 16(2)(c) is killing bona fide taxpayers, even when they have proved genuine transactions under section 155.

Other High Courts (Tripura, Gauhati, Karnataka) and the Supreme Court’s VAT decisions show a better balance:

• protect purchasers who have acted honestly and can show the full trail of goods and money,
• and go hard after the supplier who collected tax and did not pay.

In my view, that is the direction GST law must finally take nationwide. Until then, taxpayers and professionals must do three things:

1. Document and demonstrate bona fides in every case.

2. Invoke buyer-friendly judgments and distinguish Maruti where local law allows.

3. Keep raising the issue before courts, councils and policy forums until section 16(2)(c) is applied in a way that hits the real defaulter and not the honest retailer who simply stocked his goods and paid his bills.