Supreme Court keeps constitutional challenge to section 16(2)(c) open – what this means for bona fide taxpayers and GST litigation
1. Background – why section 16(2)(c) is a “flash‑point”
Section 16(2)(c) of the CGST Act says that ITC is available to the recipient only if “the tax charged in respect of such supply has been actually paid to the Government” by the supplier. In practice, this is being used to deny ITC to buyers when the supplier has not filed returns, is found non‑existent, or has defaulted in payment – even if the buyer is fully genuine.
High Courts such as Kerala, Gujarat and Patna have upheld the constitutional validity of section 16(2)(c), treating ITC as a concession and accepting the Legislature’s power to impose this condition. At the same time, other courts (for example Tripura High Court) have read down the provision to protect bona fide purchasers, holding that ITC cannot be denied where the buyer has done all that is reasonably possible and is not in collusion. This “split” is what has now reached the Supreme Court.
2. The recent Supreme Court development – constitutional issue not shut, assessee sent to appeal
In a recent matter arising from Rajasthan, the assessee had filed a writ before the High Court challenging the assessment and also attacking the constitutional validity of section 16(2)(c). The High Court, instead of examining the constitutional issue, simply relegated the assessee to the statutory appellate remedy and disposed of the writ.
Against this, the assessee approached the Supreme Court. In M/s Prime Metals v. CBIC & Ors (order dated 22.05.2026), the Supreme Court recorded the argument that section 16(2)(c) in effect compels the recipient to enforce tax compliance by suppliers, which is an “impossibility of performance” in the present GST framework. The Court has directed notice to the Union and the State, and listed the matter for further hearing, thereby formally entertaining the constitutional challenge instead of dismissing it as academic or relegating it to the High Court.
So, two parallel things happened:
The assessee is still expected to pursue the statutory appeal against the assessment order.
At the same time, the Supreme Court has kept the constitutional challenge to section 16(2)(c) alive and before itself, instead of closing that door.
This combination (appeal on facts and law + constitutional challenge pending in Supreme Court) is the key signal practitioners should note.
3. What exactly has the Supreme Court “left open”?
From the material in public domain, the Supreme Court has not yet adjudicated on whether section 16(2)(c) is constitutional or not. It has only:
Acknowledged that a substantial constitutional question arises – especially around impossibility of performance and shifting of burden to a third party’s default.
Directed that the petition and challenge be served on the Union of India and the concerned States, signalling that the provision will be tested at the highest level.
Because there is no final judgment yet, High Court decisions upholding validity (for example Kerala High Court decision holding ITC to be a concession and sustaining sections 16(2)(c) and 16(4)) continue to operate, but they now function under the “shadow” of a pending Supreme Court scrutiny.
For taxpayers, this means: the door is not closed on a constitutional attack; it is simply shifted to the correct forum and stage – the Supreme Court for validity, and appellate authorities/Tribunals for factual and legal disputes on merits.
4. Parallel High Court jurisprudence – two strands
While the Supreme Court is yet to decide, High Courts are moving along two different jurisprudential tracks:
Validity‑upholding, strict‑text line
Kerala High Court has held section 16(2)(c) constitutionally valid, emphasising that ITC is a concession and the Legislature can impose conditions to protect revenue and prevent fraud.
These judgments stress systemic leakage and cross‑border credit issues to justify requiring that tax must reach the Government before credit is finalised.
Reading‑down, taxpayer‑protection line
Tripura High Court has explicitly read down section 16(2)(c), holding that while the condition exists in the statute, it cannot be used to deny ITC to a bona fide purchaser who has received goods/services, possesses valid tax invoices, paid through banking channels, verified the supplier on the portal, and whose transactions appear in GSTR‑2A, absent collusion.
Several writs (for example before Calcutta High Court) attack section 16(2)(c) as imposing an impossible and disproportionate burden on honest buyers and as violating Articles 14 and 19(1)(g) by shifting the incidence of tax from supplier to recipient.
This divergence explains why a clear Supreme Court ruling has become so urgent. It also gives you a ready “toolbox” of authorities to cite depending on your factual matrix.
5. Constitutional arguments taxpayers are advancing
Though each petition is fact‑specific, certain core constitutional themes are common across challenges:
Article 14 – arbitrariness and hostile discrimination
Treating a bona fide purchaser, who has done everything within his control, in the same way as a fraudulent claimant is argued to be arbitrary and violative of equal protection. The law, as applied, does not distinguish between an honest recipient and a collusive one.
Article 19(1)(g) – unreasonable restriction on business
Denial of ITC due to someone else’s default directly affects working capital, cost of doing business, and pricing, thereby placing an unreasonable restriction on freedom to carry on trade or business.
Doctrine of “impossibility of performance”
The recipient has no statutory power to compel the supplier to pay tax or file returns; yet, denial of ITC punishes the recipient for that failure. It is argued that the State cannot impose a condition that is impossible to perform in the given statutory and technological framework.
Violation of the basic design of VAT/GST
GST is conceived as a value‑added tax where tax is borne at the final consumption stage; if ITC is denied to an intermediate buyer for supplier’s default, the same turnover effectively suffers tax twice, undermining the GST structure.
These arguments are already reflected in pending writs before various High Courts and now in the petition before the Supreme Court.
6. Practical implications for taxpayers and consultants – how to use this in day‑to‑day practice
Until the Supreme Court delivers a final verdict, section 16(2)(c) remains on the statute book and is being enforced. At the same time, the pending challenge gives taxpayers and professionals strategic options:
Do not ignore statutory appeals
Where an assessment under sections 73/74 denies ITC on the basis of supplier default, assessees should file the statutory appeal within time, raising all legal and factual grounds (including absence of collusion, impossibility of enforcing supplier’s payment, and compliance with all due diligence steps). The Supreme Court’s approach in Prime Metals shows that writs may be declined for alternate remedy, but that does not bar a constitutional challenge itself.
Preserve the constitutional challenge in pleadings:
In appropriate cases (especially where large demands arise purely from supplier default), assessees can expressly raise the ground that application of section 16(2)(c) is unconstitutional as applied to bona fide purchasers, while still pursuing statutory remedies. This keeps the issue alive if and when the Supreme Court lays down final law.
Document “bona fide” conduct comprehensively:
The line of decisions like Tripura High Court’s reading down section 16(2)(c) suggests that courts are willing to protect buyers who:
have tax invoices,
have received goods/services,
have paid consideration plus GST through banking channels,
have checked supplier registration on the portal, and
have matching entries in GSTR‑2A/2B.
Practically, taxpayers should institutionalise these checks and preserve evidence – this is often the difference between relief and rejection.
Use favourable High Court views as persuasive authorities:
Even in States where the jurisdictional High Court has upheld validity, you can still rely on decisions that read down the provision to argue that, at the very least, section 16(2)(c) should not operate harshly against bona fide buyers. The pending Supreme Court matter strengthens the argument that a protective interpretation is both possible and necessary.
Watch for the Supreme Court’s final word:
With the Supreme Court now seized of a direct challenge involving impossibility of performance, a structured and reasoned judgment is likely in due course, which may:
uphold the provision but read it down for bona fide buyers;
uphold it entirely as a policy choice; or
strike it down or require legislative re‑calibration.
The outcome will reshape risk assessment, documentation standards, and litigation strategy for all ITC disputes under section 16(2)(c).
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