Retrospective Cancellation of Supplier’s GST Registration: Can the Recipient’s ITC Be Denied, and does Section 16(6) of CGST Act Really Protect Them?
Summary: The article discusses GST notices issued to recipients alleging that input tax credit (ITC) is inadmissible because the supplier’s GST registration was cancelled with retrospective effect. It explains that Section 16(6), inserted by the Finance (No. 2) Act, 2024 with retrospective effect from 1 July 2017, permits the person whose registration was cancelled and later revoked to avail ITC on eligible invoices or debit notes within the prescribed time, but states that this relief applies only to that person’s own ITC and not to recipients who had purchased from such suppliers. Through an illustration, the article describes a situation where a recipient voluntarily reverses ITC after the supplier’s cancellation but cannot reclaim it after the supplier’s registration is restored because of the time limit under Section 16(4). The article advises against voluntary, unconditional reversal of ITC, recommends responding to departmental notices on merits, producing documentary evidence such as invoices, e-way bills and payment records, and pursuing appellate remedies where necessary. It also includes FAQs explaining the operation of Sections 16(4) and 16(6) and the position described in the article.
Introduction: Over the last few months, a large number of taxpayers have received notices from the GST department alleging that Input Tax Credit (ITC) availed by them is not admissible because the GST registration of their supplier stands “cancelled with retrospective effect”. The department’s stand is straightforward that if the supplier is treated as unregistered from a back date, the recipient could never have validly claimed ITC on such invoices and is liable to be reversed.
This has triggered a wave of litigations for the recipients as well as suppliers. However, Section 16(6) inserted by the Finance (No. 2) Act, 2024, with retrospective effect from 1 July 2017 has still not left any remedy for the recipients.
Section 16(6) reads:
“Where registration of a registered person is canceled under section 29 and subsequently the cancellation of registration is revoked by any order, either under section 30 or pursuant to any order made by the Appellate Authority or the Appellate Tribunal or court and where availment of input tax credit in respect of an invoice or debit note was not restricted under sub-section (4) on the date of order of cancellation of registration, the said person shall be entitled to take the input tax credit in respect of such invoice or debit note…” The credit can be taken in the return filed under Section 39 for the period up to 30th November following the end of the relevant financial year, or within 30 days of the revocation order, whichever is later.
The above provision only protects the ITC of the said person, meaning thereby the cancelled suppliers and not the recipients. Section 16(6) is a relief meant for a taxable person’s own inward supplies during the period his own registration remained cancelled. It has nothing to do with the recipient who has purchased goods / services from that person while his registration stood cancelled.
Example:
1. A (the recipient) purchases goods from B (the supplier) in April 2022. B’s GST registration is valid and active at that time, and A avails ITC of the tax charged in B’s invoice.
2. In May 2022, B’s registration is cancelled by the department say, for non-filing of returns.
3. A, to avoid litigation and interest exposure, voluntarily reverses the ITC relating to purchases from B, even though the purchase itself was genuine and made when B was validly registered.
4. Two years later, in 2024, B succeeds in appeal (or otherwise) and the cancellation of his registration is revoked, effectively restoring his registration from the original date of cancellation.
5. B, as “the said person” whose registration was cancelled and revoked, can now take shelter under Section 16(6) and claim whatever ITC he was unable to avail on his own purchases during the cancellation period.
6. A, however, has no such shelter. “A” has permanently lost credit on a transaction that was genuine, tax-paid, and undertaken at a time when the supplier was validly registered. The only reason A lost the credit is a subsequent, retrospective cancellation of the supplier’s registration, a fact entirely outside A’s knowledge or control at the time of the purchase. And when the cancellation is eventually set aside, the law extends the remedy to B, but leaves A without any remedy.
Many recipients, particularly smaller businesses without the bandwidth to litigate, choose to reverse ITC voluntarily under protest simply to stop interest from running and to avoid the personal exposure that comes with departmental proceedings.
When the supplier’s cancellations are later revoked, whether through appeal, rectification, or otherwise, Section 16(6) steps in to protect the supplier’s own credit, but the recipient who reversed credit cannot avail the same as the time limit to avail credit has already lapsed by that time as per Section 16(4).
Why Voluntary Reversal is the Worst Response? Contest It at the Appellate Level instead.
Faced with a notice on retrospective cancellation of the supplier’s registration, the instinctive reaction of many recipients is to reverse the ITC “to buy peace” and avoid interest or penalty. Given the gap identified above, this is precisely the wrong instinct, for the following reasons:
1. A voluntary, unconditional reversal (through DRC-03 without protest) can be treated by the department as an admission. Once credit is reversed unconditionally, it becomes far harder later to argue that the reversal should never have been made in the first place. An admitted liability is difficult to unwind even if the underlying cancellation is subsequently revoked.
2. The genuineness of the transaction is a matter of fact that must be placed on record, not conceded. Recipients typically already hold the invoice, e-way bill, payment proof (including proof of the 180-day payment condition under Section 16(2)(d)), delivery challans, and bank statements evidencing payment through banking channels, including the tax component. These establish that the supply was real and that the supplier was validly registered on the date of supply. Once ITC is reversed voluntarily, this evidence is never tested and the recipient forecloses the very defense that could have protected the credit permanently.
3. Courts have consistently protected a bona fide recipient’s ITC where the transaction itself is not in dispute, placing the onus on the department to first proceed against the defaulting supplier before recovering from the recipient, and requiring the department to establish collusion or actual non-payment of tax — not merely rely on cancellation of the supplier’s registration as conclusive proof of a bogus transaction.
The practical takeaway, therefore, is this: do not reverse ITC voluntarily merely because the supplier’s registration shows as cancelled, more so if it is cancelled retrospectively. Instead, respond to the notice on merits, insist that the department first proceed against the supplier, place the entire trail of documentary evidence on record, and if the demand is confirmed, carry the matter in appeal.
Frequently Asked Questions
1. My supplier’s GST registration was cancelled retrospectively. Can the department deny my ITC?
The department frequently issues notices on this basis, but retrospective cancellation of the supplier’s registration does not, by itself, prove that the transaction was bogus. If the supply was genuine, tax was actually paid, and the recipient holds proper documentary evidence, courts have taken the view that the recipient’s ITC cannot be denied merely because the supplier’s registration was later cancelled with retrospective effect.
2. Does Section 16(6) of the CGST Act protect the recipient in such cases?
No. Section 16(6) protects the ITC of the person whose own registration was cancelled and subsequently revoked i.e., the supplier’s own credit on his own purchases. It does not extend any corresponding protection to a recipient who purchased goods or services from that supplier.
3. I already reversed ITC voluntarily on my supplier’s cancelled invoices. Can I reclaim it if the supplier’s registration is later revoked?
Generally, No. Once the time limit under Section 16(4) to avail ITC for that financial year has expired, there is no statutory mechanism to reclaim credit that was voluntarily and unconditionally reversed, even if the supplier’s cancellation is subsequently revoked. This is the precise gap Section 16(6) leaves unaddressed for recipients.
4. Should I reverse ITC voluntarily when I receive such a notice?
No. Voluntary, unconditional reversal should be avoided. It is advisable to reply to the notice on merits, place the entire documentary trail (invoice, e-way bill, payment proof, delivery evidence) on record, and contest the demand up to the appellate level if required, rather than reversing credit that may later prove impossible to reclaim.
5. What if my case is already in appeal and the supplier’s cancellation is revoked in the meantime?
Use the revocation as corroborative evidence in the pending appeal to support the position that the supplier was a validly registered person for the relevant period and the cancellation is also revoked now (the underlying based on which the reversal of ITC is sought).
(This article is intended for general guidance on GST law as it stands and does not constitute legal or professional advice. Readers are advised to evaluate their specific facts against the latest statutory provisions, circulars, and judicial pronouncements before taking any position.)
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