In theory, GST is designed to be a seamless value‑added tax built on invoices, electronic trails and input tax credit. In practice, at least in Karnataka, there is a disturbing pattern emerging: departments are relying on NGTP “non‑existent dealer” reports and mechanically cancelling registrations retrospectively, invoking section 67 and 74/74A without even looking at the taxpayer’s own books. Entire ITC chains are being demolished on the basis of third‑party labels, while bonafide buyers who have done everything right are treated as soft targets.
I recently handled one such case for a scrap dealer in Karnataka. The facts, numbers and conduct of the authorities in this matter are a textbook example of how not to implement GST law. This article uses that case to show what is going wrong, what the law actually says, and why this approach is unsustainable in light of the Supreme Court and High Court judgments on natural justice and ITC for bonafide purchasers.
How the case started: NGTP report and retrospective cancellation
My client is a registered dealer under GST since 08.07.2022. The business is straightforward: purchase of scrap from registered suppliers and sale to large, established industrial units. Supplies are backed by tax invoices, e‑way bills, vehicle receipts, weighment slips and banking‑channel payments. The suppliers were active on the GST portal at the time of each transaction, they issued proper tax invoices, filed GSTR‑1, and the details correctly appeared in my client’s GSTR‑2B. My client in turn reported the ITC in GSTR‑3B in subsequent months, satisfying section 16(2)(c) on the face of it.
Somewhere else in the system, an NGTP‑type report flagged a supplier as “non‑existent”. Without verifying any facts at the buyer’s end, the department cancelled that supplier’s registration retrospectively under section 29(2) and circulated lists of “non‑existent dealers” across Karnataka through the office of the Additional Commissioner.
A series of instructions followed. Deputy/Assistant Commissioners in both State and Central formations began mechanically invoking section 67, calling buyers to produce books “with reference to NGTP lists”. No recorded reasons, no proper scrutiny, no intelligible record of what was produced. In many cases, including my client’s case, the only thing documented was an appearance entry; nothing about the invoices, e‑way bills, transport documents or payment trails that were actually produced.
In parallel, without any conclusion of these “inspections”, the officers quietly uploaded DRC‑01A on the portal. After a gap of just three or four days, they uploaded DRC‑01. This became the end of the Enforcement officer’s role; files were transferred to the jurisdictional Deputy Commissioner (Audit) with a ready‑made allegation: “ITC availed on invoices of non‑existent dealers, tax to be reversed with 100% penalty”.
The specific numbers in this case
In my client’s case, the timeline looks like this:
- 20.02.2023: Additional Commissioner of GST issues an authorisation under section 74 to the Assistant Commissioner (Enforcement).
- 03.01.2025: Inspection conducted by the Enforcement wing under section 67.
- 22.01.2025: Intimation of liability issued (section 67‑based).
- 11.02.2025: Another intimation in Form DRC‑01A by the Assistant Commissioner (Enforcement).
Meanwhile, the taxpayer appears before the Enforcement officer, producing books and records for 2022‑23, 2023‑24, 2024‑25 and 2025‑26. There is no serious discussion of these documents in any subsequent notice.
Then the crucial steps:
- 25.09.2025: DRC‑01A uploaded again, with very short time for response.
- 29.09.2025: DRC‑01 uploaded for all years from 2022‑23 to 2025‑26, without considering any reply or the detailed records already produced.
The figures in this DRC‑01 are staggering:
For 2023‑24: tax, interest and 100% penalty under section 74, totalling INR 1,29,06,082.
For 2024‑25: tax, interest and 100% penalty, but now citing section 74A (1) read with 74A(5)(i), totalling INR 2,95,27,634. For a non‑fraud track under 74A(5)(i), penalty should normally be just 10%, not 100%.
Thus, DRC‑01 proposed total liability of INR 4,24,33,716 for FY 2022‑23 to 2024‑25.
Later, the file for April 2025 to July 2025 was taken up directly by the Deputy Commissioner of GST (Audit). On the basis of the Enforcement report, and without any meaningful hearing, the Audit officer passed an order in DRC‑07 for:
FY 2025‑26 (April–July 2025): tax, interest and 100% penalty totalling INR 4,26,23,136, again under section 74A (1) read with 74A(5)(i), which in statute is the non‑fraud penalty track capped at 10% of tax in many situations.
So, the figures now stand at:
Proposed liability in DRC‑01 (2022‑23 to 2024‑25): INR 4,24,33,716.
Determined liability in DRC‑07 (part of 2025‑26): INR 4,26,23,136.
Total exposure: INR 8,50,56,852.
For a genuine scrap dealer who has acted strictly through banking channels with active GST‑registered suppliers, this is not just excessive; it is a complete breakdown of proportionality and fairness.
Where the authorities went wrong – step by step
1. Blind reliance on NGTP “non‑existent dealer” labelling
A third‑party analytic report such as NGTP may be a useful trigger for investigation, but it is not evidence against a buyer. Courts have repeatedly said that the department must examine the buyer’s own documents: tax invoices, e‑way bills, transport records, payment proofs and returns.
In this case, the Enforcement officer simply treated the supplier’s alleged “non‑existence” as gospel truth. There is no independent verification of whether the supplier existed when the goods were actually supplied, whether the goods moved, whether tax was charged and whether returns were filed at that time. My client’s records show all of this. The notices and order do not discuss any of it.
2. Mechanical use of section 67 followed by DRC‑01A and DRC‑01
Section 67 is a serious power: inspection, search and seizure can only be invoked with reasons to believe and proper recording of satisfaction. Here it has been used almost as a routine tool, only because the name appeared in an NGTP list. Books were called, appearances were recorded, but there is no reflection of the material produced anywhere in the subsequent DRC‑01A or DRC‑01.
Instead, DRC‑01A was uploaded, and within three or four days, DRC‑01 was issued. No effective time to respond, no discussion of documents already given, and no personal hearing at the Enforcement stage. This is not how adjudication under sections 73/74/74A is supposed to be run.
3. Wrong application of section 74A(5)(i) with 100% penalty
Section 74A is now the unified provision for demand and penalty from FY 2024‑25 onwards. For non‑fraud cases, section 74A(5)(i) clearly restricts penalty to 10% of the tax due or INR 10,000, whichever is higher, and even that is subject to reliefs if the taxpayer pays tax and interest within prescribed periods.
In this case, both the Enforcement DRC‑01 and the Audit DRC‑07 cite section 74A(5)(i), but proceed to levy 100% penalty as if it were a fraud case under the old section 74. There is no reasoned finding of fraud, wilful misstatement or suppression. There is no evidence of collusion with the supplier. The only allegation is that the supplier is now labelled non‑existent. That, by itself, does not convert a genuine buyer into a fraudster.
Recent literature and commentary on section 74A is very clear: if at adjudication stage it is established that there is no fraud, misstatement or suppression attributable to the taxpayer, penalty cannot exceed 10% of the tax in such cases.
4. Denial of natural justice and portal‑only communication
The Audit officer for 2025‑26 went one step further. Based entirely on the Enforcement report, he uploaded three reminders for appearance on the portal within a span of a few days and then proceeded to pass a final order. There was no effective physical communication, no meaningful hearing, and no discussion of the documents and explanations that my client had already produced.
Various High Courts, and recently the Supreme Court, have said repeatedly that natural justice is not a formality. Orders based on undisclosed material or without a genuine opportunity of hearing are liable to be quashed.
When an order imposes a liability running into several crores, simply uploading reminders and a final order on the portal without ensuring that the taxpayer has been heard is not acceptable. Yet this is what is happening.
5. Retrospective cancellation of registration without proper notice
To add insult to injury, my client’s own registration has now been cancelled retrospectively by the department. Notices were not properly served, no real opportunity was given, and the order simply cites “non‑existence” issues and NGTP reports.
Recent decisions have started drawing clear limits on retrospective cancellation. Courts have held that retrospective cancellation under section 29(2) cannot be for open‑ended past periods without clear reasons in the show cause notice; where the SCN did not propose retrospective effect, cancellation orders giving retrospective dates have been struck down.
In this case, the department has tried to solve its own NGTP problem by cancelling both the supplier and the buyer, retrospectively, instead of doing the harder work of tracing actual evasion, if any.
What the Courts are saying: Bonafide buyers cannot be scapegoats
The judicial trend across High Courts is now quite consistent on one basic point: a bonafide purchaser who has fulfilled all statutory conditions cannot be punished for the default or subsequent non‑existence of the supplier, unless there is evidence of collusion or sham.
Some key developments:
Calcutta High Court – Suncraft Energy and similar cases: The Court has held that ITC cannot be denied to a purchaser who has valid tax invoices, has received goods, has made payment through banking channels and whose ITC is reflected in GSTR‑2A/2B, merely because the vendor has failed to deposit tax or has become non‑existent later. Recovery must be pursued from the defaulting supplier, not the bonafide buyer.
Allahabad High Court – RT Infotech and later rulings: The Court has emphasised that a purchaser cannot compel the seller to file GSTR‑1 or deposit tax; using section 16(2)(c) to deny ITC to such purchasers is unsustainable, particularly where there is no allegation of collusion.
Madras High Court – lorry receipts / weighment slips: In a very recent decision, the Madras High Court has held that ITC cannot be denied merely because the recipient could not produce lorry receipts or weighment slips, where other substantive evidence such as invoices, GST registration status, payment records and returns support the genuineness of the transaction. This is directly relevant in scrap‑trade cases where weighment and transport documentation may be imperfect, but core evidence of supply and tax payment exists.
The combined message of these decisions is simple: GST is not meant to be enforced by shooting the messenger. If the buyer has done what the law expects—verifying registration, acting through banking channels, maintaining records and reporting in returns—then the department must first go after the real defaulter. Shifting the burden to the buyer by mechanical use of NGTP tags and retrospective cancellations does not stand the test of law.
The Karnataka reality: targets first, law later
Despite this clear judicial drift, what we are seeing on the ground in Karnataka is troubling.
Officers are working under pressure of targets and reports from higher‑ups. NGTP lists are treated as conclusive.
Enforcement wings invoke section 67 and 74/74A almost on autopilot. Books are called but not really examined.
DRC‑01A and DRC‑01 are issued with minimal time gaps, often without any response being realistically possible.
Files are then passed to Audit officers, who issue portal reminders and conclude adjudication without meaningful hearings.
Penalties are imposed at 100% under 74A(5)(i), ignoring the statutory 10% cap and the distinction between fraud and non‑fraud.
Meanwhile, registrations are cancelled retrospectively without proper show cause, effectively cutting off the taxpayer from business and remedial filings.
This approach treats a NGTP label almost like a conviction. It forgets that these are real businesses, with employees, bank loans, contracts and reputations. It also forgets that GST is supposed to be a law, not just a spreadsheet of “hits” and “exceptions”.
Why this matters for every bonafide buyer and seller
The case I have narrated is not an isolated aberration. It is a sign of a deeper problem in how GST enforcement is being carried out in Karnataka today.
If a bonafide buyer who has:
purchased from a then‑active registered supplier,
received goods,
paid by bank,
holds invoices and e‑way bills,
has ITC reflected in GSTR‑2B, and
has filed GSTR‑3B correctly,
can still be saddled with an 8.5 crore liability just because of NGTP labelling and mechanical orders, then no one is safe. Every trader in the chain is at risk of being treated as guilty until proven innocent, even when the law and the courts say the opposite.
This is also why my client has now turned to the High Court, challenging the retrospective cancellation of his registration and the manner in which the department has ignored his documents and explanations. Judicial review becomes the only way to remind the administration that GST is bound by the Constitution and the basic principles of natural justice.
Conclusion – from a practitioner’s desk
As a GST practitioner in Mysore, what troubles me most is not just the amount of tax, interest and penalty in this one case. It is the mindset behind it. Officers are not being allowed to sit with the books, understand the trade and apply the law calmly. Instead, they are being pushed to treat lists and dashboards as the final truth, and to convert every NGTP entry into a ready‑made fraud case with 100% penalty.
That is not what GST law says. That is not what the High Courts and the Supreme Court are saying. And it is certainly not what justice requires.
My client’s case shows that when a bonafide buyer has done everything that section 16 requires, the department’s job is to verify, not to assume. It is to investigate the real defaulter, not to destroy the easiest target. Until this changes, more honest taxpayers in Karnataka will face liabilities they have never imagined in their business life.
This article is written so that other taxpayers, professionals and even officers can see how quickly GST can become oppressive when the law is replaced by lists and presumptions. GST was never meant to be enforced on autopilot.
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