NGTP Proceedings, Non-Existent Suppliers and the Burden on Genuine Buyers: How Far Can the Department Go?
The present pattern of NGTP proceedings under GST has created one of the most serious practical problems in indirect tax administration. In many cases, the department first tags an upstream seller as NGTP or non-existent, then proceeds to reverse ITC in the hands of downstream buyers, and thereafter treats the entire chain as suspicious without first proving that the immediate buyer’s own transaction was sham, collusive or without movement of goods.
This approach has become even more troubling where officers ask a bona fide purchaser to prove not only his own purchase, but also the transaction of his supplier’s supplier, or even some higher-tier entity in the chain. In practical terms, this means that if A sold to B and B sold to C, and later A’s own supplier X is said to be non-existent, the department starts asking B or C to prove the affairs of X, a person with whom they had no contract, no privity and no access to records.
That is where the real legal and practical problem lies. A buyer can prove his own invoice, payment, transport, stock entry and onward sale. But asking him to prove what happened between some upstream entity and another alleged non-existent dealer is not due diligence; it is shifting the department’s investigative burden onto a person who was never part of that earlier leg of the chain.
The real controversy in the transaction chain
Take the example in simple form. X is later found to be a non-existent entity. X allegedly sold to A. A sold to B under a tax invoice and B paid value plus tax. B then sold to C under a tax invoice and C also paid value plus tax. After some time, the department says that because X is non-existent, the purchases of A are doubtful, therefore the sales of A to B are also doubtful, and therefore the sales of B to C are also suspicious.
Once this chain-based suspicion starts, the officer frequently asks B and C to produce details of X, prove the existence of X, or explain how X supplied to A. When B and C fail to do this, which is natural because they never dealt with X, the department treats that failure itself as a ground to reverse ITC, invoke Section 74, and in some cases even propose cancellation or branding of the recipients as part of a bogus chain.
This is neither fair in law nor workable in business. B is required to prove his purchase from A. C is required to prove his purchase from B. A must answer for his own purchase from X. The burden of proving that X never supplied to A, or that A knowingly entered into a bogus arrangement with X, is on the department and on A, not on B or C.
Why asking B or C to prove X is fundamentally unfair
There are three reasons why this line of inquiry is unreasonable.
First, it is factually impossible. B and C have no access to X’s purchase invoices, stock records, transport documents, bank statements or place of business. They cannot produce documents that were never in their custody and never belonged to their contractual transaction.
Second, it confuses the legal burden. The GST law requires the recipient to satisfy statutory conditions relating to his own claim of credit: invoice, receipt of goods or services, tax being charged, and other statutory compliance. The law does not require every purchaser to audit the entire ancestry of the goods through unknown upstream entities.
Third, it rewards departmental inaction. If the department has concluded that X is non-existent, its primary task is to investigate A’s dealings with X, recover tax from the actual defaulting or fictitious entities, and establish with evidence whether A’s onward sale to B was itself fictitious. Instead, in many cases, the easier path is chosen: pressure the available downstream buyer, reverse ITC with interest and penalty, and leave the real fraud investigation unfinished.
What recent High Courts have said
The more balanced judicial view now emerging is that ITC of a bona fide buyer cannot be denied merely because the supplier, or even an upstream supplier, has later been found to be non-compliant, non-traceable or retrospectively cancelled, unless the department first examines the genuineness of the buyer’s own transaction and brings some material showing collusion, fraud or absence of actual supply.
The Himachal Pradesh High Court in Himalaya Communication Pvt. Ltd. v. Union of India held that ITC cannot be denied solely because the supplier’s registration was retrospectively cancelled, without first examining the genuineness of the transaction and the documents produced by the purchaser. The Court made it clear that the authority must verify the transaction itself instead of mechanically relying on retrospective cancellation as if it automatically destroys every past supply.
The Calcutta High Court has also reiterated that retrospective cancellation of a supplier’s registration, by itself, cannot be the sole basis to deny ITC to a bona fide purchaser, particularly where there is no allegation that the purchaser was part of fraud and where primary evidence such as invoices, e-way bills, transport documents and banking payments is available.
Recent Karnataka-focused commentary also notes that the NGTP tag is only a risk indicator and not conclusive proof against the buyer. The department still has to examine the purchaser’s documents and cannot jump from portal-based suspicion to automatic reversal of ITC.
A similar line is seen in the April 2026 report noting that ITC cannot be denied to a bona fide purchaser merely because of the supplier’s failure to deposit tax, unless there is fraud, collusion or a finding that the transaction itself is not genuine. The same analysis also emphasises that where tax is not paid, the department must proceed against the defaulting supplier rather than shifting the entire burden onto the purchaser.
The legal difference between suspicion and proof
One of the biggest practical distortions in NGTP matters is that suspicion is treated as proof. Once a name appears in an internal alert, backend report, DGGI communication or NGTP list, many adjudication orders proceed as if all linked transactions automatically become bogus.
But suspicion and proof are not the same. Even where there is material against X, the department still has to establish, with some acceptable evidence, at least one of the following against B or C: that goods never moved, that invoices were only paper entries, that payment was circular or fictitious, that stock records were false, or that the buyer was knowingly part of a collusive arrangement.
Without that exercise, the order becomes a chain-presumption order: X is bogus; therefore, A is bogus, therefore B is doubtful, therefore C loses ITC. Courts have increasingly shown discomfort with this method because it reverses the normal burden of proof and punishes those who are easiest to reach rather than those who actually created the fraud.
What B and C should really be required to prove
A purchaser is not immune merely because he says he is bona fide. He must still prove his own leg of the transaction properly. In a genuine case, B or C should be ready to produce:
- tax invoice from the immediate supplier;
- proof of payment through banking channels;
- e-way bill, lorry receipt, consignment note, weighment slip or transport proof where applicable;
- inward register, stock register and goods receipt note;
- outward sale documents if the goods were resold;
- books of account showing accounting entry and tax treatment.
If these documents are in order, then the enquiry should remain focused on that person’s own leg of the transaction. The officer may test the truth of those documents, but he cannot extend the burden endlessly into the upstream chain and insist that B or C prove transactions between A and X or between X and some other dealer. That is not a statutory requirement; it is an impossible expectation imposed during investigation and adjudication.
Why NGTP proceedings are causing huge and repeated ITC reversals
The practical reason this issue has become so serious is that NGTP proceedings are now being used as a revenue shortcut. Once an upstream supplier is flagged, the department begins mass scrutiny of downstream recipients and raises huge reversal proposals under Section 74 with interest and penalty, often without separating genuine trade from paper trade.
The result is severe working-capital damage. A genuine purchaser first pays GST to the supplier, then avails ITC in the return, and years later is asked to reverse the same credit with interest and penalty only because someone in the upstream chain is later labelled non-existent. This amounts to the buyer bearing the tax twice, even though he had neither visibility nor control over that upstream default.
This pattern has reportedly continued through financial years up to 2024-25, and the problem has not reduced. In fact, once Section 74A came in from the financial year 2024-25 onward, the concern among practitioners is that consolidated demand machinery may make it easier for the department to continue broad-brush allegations unless adjudicating officers consciously distinguish fraud chains from genuine trade chains.
Section 74 orders based on chain suspicion
A recurring grievance in the field is that many Section 74 show-cause notices and adjudication orders simply reproduce investigation allegations, rely on NGTP tags, refer to statements or backend reports, and then conclude that credit is inadmissible because the supplier or an upstream supplier was not genuine.
Very often, these orders do not squarely address the recipient’s documentary evidence. They do not clearly record whether goods were not received, whether transport documents were false, whether bank payments were fictitious, or whether there was evidence of collusion. Instead, they proceed on the assumption that if one link fails, all later links fail.
That is precisely what the High Courts have objected to. The authority must decide the case on facts relevant to the assessee before it, not on an untested upstream narrative. If B has produced all transaction records, the authority must examine those records. If those records are false, say so and give reasons. But the authority cannot stop with the statement that X was non-existent and therefore B must reverse credit.
Conversion of Section 129 proceedings into Section 130
I am also raised another important field problem: after detention proceedings under Section 129, authorities sometimes attempt to straightaway move into confiscation under Section 130, treating transport irregularities or suspicion of evasion as if confiscation necessarily follows. Recent Gujarat High Court reporting indicates that the authorities cannot abandon the statutory procedure under Section 129 and straightaway resort to confiscation under Section 130 without satisfying the distinct legal requirements for confiscation.
The Gujarat High Court has explained that Sections 129 and 130 operate in distinct fields. Confiscation under Section 130 may be permissible where there is concrete material showing intention to evade tax, but the department cannot simply jump from detention to confiscation by treating suspicion as enough.
This principle is relevant here also. Just as the department cannot leap from detention to confiscation without the proper legal foundation, it should not leap from NGTP suspicion to automatic ITC denial against downstream buyers without proving their own participation or lack of genuine supply.
Why Section 74A raises concern from 2024-25 onward
Section 74A was introduced for financial year 2024-25 onward and is intended to replace the earlier separate treatment under Sections 73 and 74 for future periods. While the amendment aims to streamline demand provisions, practitioners are rightly concerned that unless officers apply it carefully, the same old style of broad, allegation-heavy notices may continue under a new provision.
The problem is not only the section number. The problem is the investigative mindset. If the mindset remains that any upstream irregularity justifies a downstream demand unless the buyer disproves the entire chain, then whether the notice is under Section 74 or Section 74A, the hardship to bona fide taxpayers will remain the same.
What the department should do instead
If the department genuinely wants to curb bogus entities and protect revenue without destroying genuine trade, the approach has to change in five ways.
First, proceed against the real defaulting supplier and the operators of the non-existent entity. If X is fake, find who created X, who controlled the bank account, who issued the invoices and who retained the benefit. If A dealt with X fraudulently, prove that directly against A.
Second, examine the immediate buyer’s own documents before proposing reversal. The officer should ask a simple question: did B actually receive goods from A and did C actually receive goods from B? That question must be answered from invoice, payment, transport and stock evidence, not from chain suspicion alone.
Third, do not shift impossible burdens. B or C cannot be compelled to produce the books, transport records and bank statements of X, an unknown upstream dealer. The failure to produce impossible evidence should never become the reason to reverse ITC.
Fourth, avoid mechanical interest and penalty where the basic allegation itself is only derivative. Once the genuineness of the immediate transaction is established, there is no justification to automatically attach interest and penalty merely because of upstream failure.
Fifth, adjudication must be reasoned and individualised. A speaking order must analyse the assessee’s own evidence and record specific findings of collusion, lack of supply or false documents. Boilerplate reliance on NGTP tags or intelligence alerts is not enough.
Practical defence points for taxpayers and professionals
Where an assessee faces this kind of notice, the reply should be focused, factual and legally disciplined.
1. State clearly that the assessee can prove only his own leg of the transaction and has no privity with the supplier’s supplier or any higher-tier entity.
2. Produce complete primary evidence for the assessee’s own purchase and sale leg: invoice, payment, transport, stock, return disclosure and books.
3. Demand that the department identify the exact allegation against the assessee: non-receipt of goods, fake payment, collusion, circular trading, or false documentation. Mere reference to NGTP is not enough.
4. Argue that retrospective cancellation, NGTP tagging or upstream non-existence, by themselves, do not automatically destroy a genuine completed transaction.
5. If third-party statements are relied upon, ask for copies and seek cross-examination where necessary, because untested statements cannot become the sole basis of civil consequences of this magnitude.
The larger policy failure
The present trend also reveals a larger policy failure. GST was supposed to be a technology-based system where the department would use return data, e-way bills and analytics to identify the real fraudster. Instead, in many NGTP matters, technology is used only to generate suspicion, while the hardest part of the work—proving fraud against the actual operator—is shifted onto recipients through notices and reversals.
This is why honest businesses feel harassed. They see that the person who actually floated the bogus entity is rarely reached in time, but the registered downstream dealer with books, bank payments and place of business receives the notice, faces hearing after hearing, and is saddled with tax, interest and penalty.
That kind of administration may show short-term demand figures, but it weakens the credibility of the GST regime. It also discourages honest trade because no businessman can indefinitely audit the entire hidden past of every upstream link in the market.
Conclusion by the author
In my view, the department has gone too far in many NGTP proceedings. A genuine buyer can be asked to prove his own purchase, his own payment, his own movement of goods and his own books of account. That is fair. But it is not fair, and it is not supported by the better line of law, to ask him to prove the business affairs of his supplier’s supplier or some unknown upstream entity, and then reverse ITC merely because he cannot do the impossible.
If A bought from a non-existent X, then A must answer for that transaction and the department must investigate and prove that case. If B bought genuinely from A and C bought genuinely from B, then their credits cannot be denied only because the department suspects something farther up the chain, unless it can also prove that B or C were part of the fraud or that their own transactions were not genuine.
The same caution applies to the present pattern of Section 74 adjudication, the tendency to convert Section 129 detention matters into Section 130 confiscation proceedings without proper foundation, and the continuing expansion of demand proceedings up to and beyond financial year 2024-25 under the new Section 74A framework. A change of section number will not solve the problem unless there is a change of approach.
The law must protect revenue, but it must protect genuine trade also. If NGTP remains only a label to shift burden from the department to the buyer, then the system will continue to create huge liabilities, endless litigation and serious injustice to bona fide taxable persons. The answer lies in proper investigation of the real fraudster, careful examination of the immediate transaction, and reasoned adjudication based on evidence—not chain suspicion, not impossible burdens, and not mechanical reversal orders.
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