Retrospective GST Cancellation Cannot Deny ITC Without Evidence Against Bona Fide Buyers

Summary: The article examines the use of Non-Genuine Taxpayer (NGTP) tagging and retrospective GST registration cancellation, alleging that these measures are being used to deny Input Tax Credit (ITC) to bona fide buyers despite compliance with Section 16(2) of the CGST Act. It states that buyers who possessed valid tax invoices, received goods, made payments through banking channels, and claimed ITC based on suppliers’ filed returns are later required to reverse ITC after suppliers are retrospectively declared non-genuine. The article discusses judicial decisions emphasising that retrospective cancellation alone cannot justify denial of ITC without evidence against the buyer and highlights the need to observe principles of natural justice by providing relevant documents and reasons. It also addresses concerns regarding repeated summons, short timelines, dual proceedings by Central and State authorities, and mechanical orders under Sections 74 and 74A. The article recommends that buyers maintain documentary evidence, seek disclosure of departmental material, and challenge arbitrary proceedings through appropriate legal remedies.

NGTP Tag, Retrospective GST Cancellation and Harassment of Bona Fide Buyers – How Weak Administration Is Violating Section 16 and Natural Justice in the 9th Year of GST

1. Background – How NGTP and retrospective cancellation are being misused

In the last few years, there is a clear pattern all over the country. One supplier is suddenly branded as “Non-Genuine Taxpayer (NGTP)”. Some internal report is prepared by DGGI – mostly cyclostyle, same language, just name and GSTIN changed – and sent to jurisdictional officers of Central and State.

On the strength of that single paper, officers start visiting buyers and issuing summons. They do not show any proper proof – no copy of cancellation order, no date from when registration is cancelled, no mahazar of business place, no statement from the supplier, no written reasons for retrospective cancellation. Still, they ask buyers to reverse ITC with interest and penalty and treat every transaction with that supplier as doubtful.

At the time of supply, the position was very different. The supplier was duly registered on the portal, invoices were issued, goods were delivered, e-way bills were generated, payments were made through bank, taxes were paid and GSTR-3B was filed. After three or four years, one fine day, the department decides to cancel registration retrospectively and declares that the supplier “does not exist” or is “not traceable”. The entire burden is then shifted to the buyers, who are told that they must now prove receipt of goods in detail for old years, otherwise ITC will be denied.

This is how NGTP tag and retrospective cancellation are actually being used in field – not as a tool to catch frauds, but as a shortcut to raise demands on genuine buyers who have already complied with the law at the time of transaction.

2. Legal position of Section 16(2) – what the buyer has to do and what the department has to respect

Section 16(2) of the CGST Act is very clear. For availing ITC, the recipient must:

Have a tax invoice or other prescribed document.

Receive the goods or services.

Ensure that tax charged in respect of such supply has been actually paid to the Government.

File return and reflect ITC in GSTR-3B.

If these conditions are satisfied, ITC is not a charity or concession. It is a statutory right. It cannot be lightly taken away just because, years later, the department discovers some issue at the supplier’s end or cancels registration retrospectively. The law does not say that ITC is automatically invalid if the supplier is later treated as NGTP or “non-existent”.

In real business, the buyer proves receipt of goods by practical records – e-way bills, lorry receipts, weighment slips, gate entries, stock registers, consumption in production. Tax payment is proved by the fact that the supplier’s invoices are visible in GSTR-2A/2B, the supplier has filed GSTR-3B and the portal shows that tax has been discharged. Once that is done, Section 16(2)(b) and 16(2)(c) are satisfied.

The department still calls buyers and demands that they must again prove receipt of goods for three or four-year-old transactions, ignoring that all basic data is already there in the system. There is no loss to Government because tax has already been paid. Even then, officers insist that ITC must be reversed only because the supplier is now in NGTP list. This is contrary to the scheme of Section 16 and turns a compliance-based system into a punishment-based system.

3. Case law – courts are standing with bona fide buyers

Several High Courts have started addressing this misuse. One prominent example is Gargo Traders v. Joint Commissioner, Commercial Taxes (Calcutta High Court, WPA No. 1009 of 2022, order dated 12.06.2023). The department denied benefit only because the supplier’s registration was cancelled retrospectively. The Court categorically held that if, at the time of transactions, the supplier was a registered person on the portal and the buyer had received goods and paid the consideration, then retrospective cancellation by itself is not a ground to deny the benefit.

The Court emphasised that the department must examine the documents produced by the buyer. It cannot reject claims merely by waving a cancellation order of the supplier. Suspicion about supplier cannot replace evidence against buyer. This is a very important principle for all NGTP cases.

Similar views have been expressed by other High Courts in different contexts – that when the buyer proves receipt of goods, payment through banking channels and proper reflection in returns, ITC cannot be denied only because later some default is found at supplier’s end or registration is cancelled retrospectively. Unless collusion, fraud or knowledge of wrongdoing by the buyer is shown, bona fide recipients should not be punished for someone else’s misconduct.

Courts have also criticised vague show-cause notices and cancellation orders which do not give specific grounds or reasons for retrospective effect. The law expects that such serious action must be based on detailed reasoning and proper opportunity, not on generic allegations.

4. Natural justice and retrospective cancellation – double violation

Retrospective cancellation of GST registration is a very serious step. It affects all past transactions of that supplier and impacts multiple buyers. Therefore, two basic safeguards of natural justice are essential:

The supplier must get a clear show-cause notice with specific allegations.

The cancellation order must record reasons, and retrospective effect must be justified.

When registration is cancelled mechanically, without clear reasons, and later a cyclostyle NGTP list is circulated to officers, there is already violation of natural justice against the supplier.

The second violation happens when that same NGTP paper is used to pressurise buyers. They are asked to reverse ITC and pay interest and penalty, without being given basic documents like cancellation order, date of effect, grounds for NGTP, mahazar of premises or supplier’s statement. Buyers are then forced to defend themselves in the dark, without knowing exactly what is alleged.

Natural justice says that any person against whom adverse action is proposed must be given full details and documents relied upon. If the department wants to shift burden under Section 155, it must at least disclose the material on which it claims that the supplier is non-existent or NGTP. Otherwise, proceedings become one-sided and arbitrary.

5.  Harassment through summons, late-hour verification and unrelated questioning

In NGTP matters, summons have become a standard tool. Buyers receive multiple summons from Enforcement wings. Officers call them to office, keep them waiting beyond official hours, and ask a long list of questions – many of them unrelated to the specific NGTP issue.

I have given a practical example. One client received three summons from State Joint Commissioner (Enforcement) for NGTP, appeared each time, produced documents for three years, and the Assistant Commissioner concluded verification for that period. Later, without any coordination, the same client gets summons from Central Superintendent for the same NGTP issue and same years, with just 3–4 days to produce entire records.

To prepare year-wise statements, invoices, e-way bills, weighment slips, vouchers, bank statements for each supplier, GSTR-1 and GSTR-3B, stock records etc., for three or four years, within four days, is beyond practical possibilities for any business. Officers know this, yet they set unreasonable timelines and then threaten to invoke Section 67 (search and seizure) if documents are not produced.

This is not investigation. It is pressure tactics. In an era where GST is fully digital, data is already on the portal – invoices, e-way bills, return filing, tax payment – yet officers behave as if nothing is available and everything must be recreated manually. This shows a serious disconnect between technology reality and ground-level administration.

6. Dual jurisdiction – State vs Central proceedings on the same NGTP issue

Dual jurisdiction is another major problem. The same buyer is called by State Enforcement for NGTP matter and then by Central Enforcement for exactly the same issue, same supplier and same years. Both sides ask for similar documents, both fix hearings, both threaten separate action.

In theory, GST is “One Nation One Tax”. In practice, it is “Two Authorities One Assessee”. For NGTP and retrospective cancellation matters, this dual jurisdiction creates:

Duplication of effort – buyers have to compile documents twice, attend two sets of hearings.

Conflicting findings – State officer may accept evidence and close matter, while Central officer still keeps issue open or passes demand, or vice versa.

Continuous harassment – even after one side has fully verified and concluded, the other side can reopen the same facts.

From the buyer’s perspective, this is unbearable. He does not know which authority’s conclusion will ultimately prevail, and his time and energy are consumed by repeatedly answering the same questions.

Remedies in such dual jurisdiction cases include:

Written representation pointing out that State Enforcement has already examined the same NGTP issue, attaching copies of summons, replies and verification report, and requesting Central officer to either rely on those findings or at least coordinate to avoid duplication.

Requesting reasonable time for producing documents, clearly stating practical constraints and volume of records. If the officer refuses and still insists on immediate action, such refusal can be highlighted later in appeal or writ as evidence of harassment.

In extreme cases where both authorities keep issuing overlapping notices and demands on the same point, approaching High Court to seek protection against parallel proceedings and to consolidate the matter, especially when the buyer is a bona fide taxpayer and has cooperated fully.

Dual jurisdiction issues will continue as long as structural changes are not made, but buyers can at least create a clear paper trail showing their cooperation and the department’s unreasonable approach.

7. What bona fide buyers can and should do – practical defence strategy

Given this ground reality, bona fide buyers cannot simply sit and suffer. They need a clear defence strategy.

(a) Ask for basic proof before extended cooperation

A buyer is not an employee of the department. He is a taxpayer with rights. When officers come with one NGTP list and start questioning, the buyer can calmly ask:

Please give copy of cancellation order of supplier.

Please mention from which date the registration is cancelled.

Please state the grounds for retrospective effect.

Please give copy of any report or mahazar which shows non-existence.

This is not disrespect. It is basic natural justice. If the department wants to treat all transactions with that supplier as doubtful, buyers are entitled to see the basis. Without these, how can they properly defend themselves?

(b) Build evidentiary bundle for Section 16(2)

Even though compiling full records is heavy work, buyers should gradually build supplier-wise files covering:

Tax invoices and debit notes.

E-way bills and delivery documents.

Weighment slips, lorry receipts, gate entries.

Stock registers and consumption reports.

Bank statements showing payment to supplier.

GSTR-2B and GSTR-3B where ITC is claimed.

This bundle need not be produced overnight. Buyers can write letters to officers explaining that they will need reasonable time to gather everything and that they will produce documents in phases. If officer fixes unreasonably short deadlines, this should be recorded and can later support the plea of harassment.

(c) Challenge mechanical orders under Sections 74 and 74A

Orders under Section 74 and new Section 74A based only on NGTP lists are usually mechanical. They copy allegations, ignore submissions and straightaway demand reversal of ITC plus interest and penalty.

Such orders can be attacked at several levels:

During adjudication: point out that there is no independent evidence of non-receipt of goods or buyer’s collusion, and insist on cross-examination of any departmental witness, if any.

In appeal under Section 107: show that the order is non-speaking, does not discuss documents and is entirely NGTP-paper driven.

In writ before High Court: in appropriate cases, especially where huge demands are raised purely on retrospective cancellation and NGTP tag, rely on case law (like Gargo Traders) to argue that such approach is contrary to Section 16 and natural justice.

(d) Use portal data to prove there is no revenue loss

Since GST is fully digital, buyers should continuously highlight that:

Supplier’s invoices are reflected in GSTR-2A/2B.

Supplier has filed GSTR-3B and paid tax.

Buyer has correctly reported in his 3B and paid output tax.

If the Government has already collected the tax, denying ITC to buyer amounts to collecting tax twice on the same transaction. Portal data becomes a strong tool to show that there is no revenue loss and that NGTP and retrospective cancellation are being misused to generate artificial demands.

8. Can a bona fide buyer refuse to cooperate if no proof is given?

A very practical question is whether a bona fide buyer can refuse to cooperate when the department does not furnish any proof of NGTP or cancellation order. In strict legal terms, complete refusal is risky. Officers may treat non-attendance or silence as non-cooperation and pass ex parte orders or start coercive action.

However, cooperation does not mean surrender. Buyers can adopt a balanced approach:

Attend summons and reply, but always in writing.

Record that despite request, copies of cancellation order, NGTP report and reasons were not supplied.

State that burden under Section 155 cannot be shifted entirely on buyer without fair disclosure by department.

Produce documents in reasonable phases and continuously stress that they are bona fide recipients who satisfied Section 16(2).

This way, the record will show that the buyer cooperated but demanded transparency. This is very valuable later in appeal or writ, where courts give importance to whether the taxpayer acted bona fide and whether the department respected natural justice.

9. Human angle – GST administration and bona fide taxpayers

GST was sold as “Good and Simple Tax”. After nine years, digital infrastructure has improved, fake entities are being gradually filtered at registration stage, and the portal is capable of showing complete transaction history.

Despite this, harassment of genuine buyers is increasing in NGTP and retrospective cancellation matters. Officers rely on one internal paper, treat entire chains of transactions as suspect, and then push businesses into a cycle of notices, summons and latenight verifications. There is very little appreciation of the daily difficulties of trade and industry, especially MSMEs, in maintaining and producing multiyear records at short notice.

Bona fide buyers are not asking for exemption from law. They are only insisting that law should be applied fairly – that Section 16(2) should be honoured, natural justice should be observed, and NGTP should not become a shortcut for revenue collection from easy targets.

10. Conclusion – NGTP practice must be corrected

NGTP tagging and retrospective cancellation of registration are legitimate tools for tackling fake suppliers and fraudulent ITC. But they cannot be allowed to become weapons against honest buyers who have complied with Section 16(2), paid tax and kept their business records.

The present practice – relying on cyclostyle DGGI reports without cancellation orders or mahazars, issuing multiple summons from dual jurisdictions, fixing impossible timelines, and then passing mechanical orders under Sections 74 and 74A – is clearly against the spirit of GST and principles of natural justice.

Courts are slowly correcting this course by protecting bona fide recipients and insisting that evidence, not mere tags, should decide ITC entitlement. It is time for administration to change its mindset, to respect portal data, to avoid duplication between State and Central authorities, and to treat taxpayers as partners in revenue, not as suspects to be hunted.

Till that change happens, taxpayers and professionals have to keep documenting facts, challenging unjust demands and spreading awareness on how GST is actually being applied on the ground. Only then will NGTP be used where it truly belongs – against real fraudsters – and not against genuine buyers who are now carrying the burden of weak administration.