Section 16(2)(c) CGST Act: Law, Constitutional Challenges & Judicial Views

Summary: The article examines Section 16(2)(c) of the CGST Act, 2017, which makes Input Tax Credit (ITC) subject to the supplier having actually paid the tax to the Government, and discusses its legislative intent, statutory framework, constitutional challenges, and judicial interpretation. It outlines the controversy over denial of ITC to bona fide purchasers where suppliers default in remitting tax, despite the purchaser having paid GST and complied with statutory requirements. The article reviews the interaction between Sections 16(2)(c) and 41, the impact of evolving GST compliance systems such as the Invoice Management System (IMS), arguments supporting and opposing the provision, and differing judicial approaches. It notes that the Allahabad High Court, Tripura High Court, and Delhi High Court have emphasized protection of bona fide purchasers in varying contexts, while the Gujarat High Court upheld the constitutional validity of Section 16(2)(c) through a strict statutory interpretation. It further notes that the Supreme Court dismissed the Special Leave Petition against the Gujarat High Court decision without a reasoned judgment on the merits, leaving the judicial divergence unresolved.

Introduction

The introduction of the Goods and Services Tax (GST) on 1 July 2017 marked one of the most significant indirect tax reforms in India’s fiscal history. Envisioned as the “One Nation, One Tax” regime, GST sought to eliminate the cascading effect of taxes by establishing a seamless flow of Input Tax Credit (ITC) across the entire supply chain. The concept of uninterrupted credit is the cornerstone of the GST framework, ensuring that tax is ultimately borne only by the final consumer while businesses are relieved from the burden of embedded taxes. The success of this destination-based consumption tax depends largely upon the efficient functioning of the ITC mechanism.

Recognizing the importance of ITC, Section 16 of the Central Goods and Services Tax Act, 2017 confers upon a registered person the statutory entitlement to claim credit of the tax paid on inward supplies, subject to the fulfilment of prescribed conditions. While clauses (a), (b), and (d) of Section 16(2) require possession of a valid tax invoice, receipt of goods or services, and furnishing of the prescribed return, Section 16(2)(c) introduces a distinct and far-reaching condition by providing that the tax charged on the supply must have been actually paid to the Government, either in cash or through the utilization of admissible Input Tax Credit by the supplier.

Among all the conditions governing ITC, Section 16(2)(c) has emerged as one of the most controversial and heavily litigated provisions under the GST regime. The controversy arises because the recipient of goods or services has no direct control over the supplier’s statutory obligation to deposit the tax collected with the Government, nor does the recipient have any statutory mechanism to independently verify such payment. Consequently, a bona fide purchaser who has received the goods or services, paid the full consideration including GST, maintained proper tax invoices, and complied with every statutory obligation may nevertheless face denial of ITC solely because of the supplier’s subsequent default. This raises fundamental questions concerning fairness, commercial certainty, proportionality, and the constitutional validity of imposing such a consequence upon an innocent recipient.

The issue has acquired even greater significance in light of the evolving compliance architecture under GST. The introduction of the Invoice Management System (IMS) and the continuous strengthening of technology-driven compliance measures have substantially improved invoice-level reconciliation and verification of supplier-reported transactions. However, these systems still do not provide the recipient with any mechanism to verify whether the supplier has actually discharged the tax liability to the Government, thereby leaving the core controversy surrounding Section 16(2)(c) unresolved.

The constitutional validity and interpretation of Section 16(2)(c) have now produced divergent judicial opinions across various High Courts. While decisions such as M/s Safecon Lifescience Pvt. Ltd. v. Additional Commissioner Grade-2 & Another (Allahabad High Court), M/s Sahil Enterprises v. Union of India & Others (Tripura High Court), and Shanti Kiran India Pvt. Ltd. v. Commissioner, Trade & Taxes Department (Delhi High Court) have emphasized the protection of bona fide purchasers and the principles of natural justice, the Gujarat High Court in Maruti Enterprise through its Authorized Partner v. Union of India & Others adopted a strict statutory interpretation and upheld the constitutional validity of Section 16(2)(c). The subsequent dismissal of the Special Leave Petition in Bhandari Scrap Traders v. Union of India & Others by the Supreme Court has further intensified the debate, while leaving open important questions regarding the scope and future interpretation of the provision.

This article undertakes a comprehensive examination of Section 16(2)(c) of the CGST Act, 2017 by analysing its legislative intent, statutory framework, constitutional dimensions, and practical implications. It critically evaluates the conflicting judicial approaches adopted by various High Courts, examines the interplay between Sections 16 and 41, the impact of evolving GST compliance mechanisms such as IMS, and the constitutional principles embodied in Articles 14, 19(1)(g), 265, and 300A of the Constitution of India. The article further seeks to identify a balanced legal approach that effectively combats tax evasion while safeguarding the legitimate rights of bona fide taxpayers, thereby preserving the fundamental objective of GST as a seamless value-added tax system.

Ultimately, the controversy surrounding Section 16(2)(c) extends beyond the mere interpretation of a statutory condition; it raises a broader question of whether the burden of ensuring tax compliance by one taxable person can, consistent with constitutional principles, be shifted to another who has neither control over nor access to the supplier’s tax affairs. The answer to this question will not only determine the future of Input Tax Credit litigation but will also shape the confidence of businesses in the stability, predictability, and fairness of India’s GST regime.

Statutory Provision (as enacted)

Section 16(2) provides that notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both unless the following conditions are satisfied.

Clause (c) reads:

“Subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply.”

Essential Ingredients of Section 16(2)(c)

For ITC to be admissible:

1. Tax must have been charged on the invoice.

2. The supplier must have actually paid the tax to the Government.

3. Such payment may be:

• • in cash; or
  • through utilization of admissible ITC.

4. The provision is expressly subject to Section 41 of the CGST Act.

Legislative Intent

The object behind Section 16(2)(c) is:

• to prevent fake invoice fraud;
• to prevent wrongful availment of ITC;
• to ensure that credit flows only where tax has actually reached the Government;
• to protect Government revenue.

Major Controversy

The controversy is whether:

A bona fide purchaser who has paid GST to the supplier should lose ITC merely because the supplier failed to deposit that GST with the Government.

This has led to conflicting judi cial views.

Judicial Interpretation

1. Allahabad High Court – Safecon Lifescience (2025)

The Court held:

• supplier’s default alone cannot justify denial of ITC;
• if the purchaser proves:
  • genuine transaction,
  • tax invoice,
  • movement of goods,
  • payment through banking channels,
  • absence of collusion,
    then ITC should not be denied merely because the supplier subsequently defaulted.

Principle:

Supplier’s default is not automatically the purchaser’s fraud.

2. Tripura High Court – Sahil Enterprises (2026)

The Court upheld the constitutional validity of Section 16(2)(c) but read it down.

It held:

Section 16(2)(c) should apply only where:

• fraud,
• collusion,
• sham transactions,
• or conscious participation by the recipient

are established.

A bona fide purchaser should not suffer merely because the supplier defaulted.

3. Delhi High Court – Shanti Kiran (DVAT)

Although under the DVAT Act, the Court laid down an important VAT principle:

The purchaser cannot be expected to verify whether the seller has deposited tax with the Government.

The Department should first recover from the defaulting seller.

This decision continues to be cited as a persuasive authority in GST matters.

4. Gujarat High Court – Maruti Enterprise (2026)

The Gujarat High Court adopted a strict textual approach.

It held:

• Section 16(2)(c) is constitutionally valid.
• ITC is a statutory concession.
• Actual payment by the supplier is a mandatory condition.
• Courts cannot read down or rewrite the statute.

5. Supreme Court – Bhandari Scrap Traders (2026)

The Supreme Court dismissed the SLP against Maruti Enterprise.

Important legal effect:

• The Supreme Court did not render a detailed judgment on the merits.
• The dismissal does not constitute a declaration of law under Article 141.
• However, it leaves the Gujarat High Court judgment undisturbed between the parties and enhances its persuasive value.

Interaction with Section 41

Section 16(2)(c) begins with:

“Subject to the provisions of Section 41.”

After the Finance Act, 2022, Section 41 provides for self-assessment of ITC, with reversal required where tax is not paid by the supplier. Effective from 01/10/2022

This has led to debate on whether Section 41 softens the rigour of Section 16(2)(c) or merely prescribes the mechanism for reversal and re-availment. Courts have differed in their approach, and this remains an area of continuing litigation.

Constitutional Challenge

The principal constitutional grounds raised against Section 16(2)(c) include:

Article 14 – Equality

A bona fide purchaser is treated on par with a fraudulent purchaser despite having no control over the supplier’s tax compliance.

Article 19(1)(g) – Freedom of Trade

The provision places an onerous burden on businesses to monitor suppliers’ tax payments, which may be practically impossible.

Article 265 – No Tax Except by Authority of Law

Where the purchaser has already paid GST to the supplier, denial of ITC is argued to result in an indirect double burden.

Article 300A – Property

ITC is contended to be a valuable statutory right, and its deprivation without fault is challenged as arbitrary.

Arguments Supporting Section 16(2)(c)

The Revenue typically contends that:

• ITC is not an inherent right but a statutory benefit.
• Parliament is competent to prescribe conditions for availing ITC.
• The condition of actual tax payment is intended to curb fake invoices and tax evasion.
• Economic legislation is entitled to a strong presumption of constitutionality.

Arguments Against Section 16(2)(c)

Taxpayers generally contend that:

• the recipient cannot compel the supplier to pay tax;
• there is no statutory mechanism to verify the supplier’s actual payment;
• once GST is paid to the supplier and genuine goods or services are received, ITC should not be denied solely due to the supplier’s default;
• the Department should recover tax from the defaulting supplier rather than from an innocent recipient.

Present Legal Position

The current judicial landscape may be summarized as follows:

Litigation Strategy

Where ITC is denied under Section 16(2)(c), an assessee should, as far as possible, establish:

• genuine purchase transaction;
• valid tax invoice;
• receipt of goods or services;
• payment of consideration (including GST) through banking channels;
• accounting entries in the books;
• e-way bills, transport documents, weighment slips, and stock records (where applicable);
• supplier’s registration status at the time of the transaction;
• absence of fraud, collusion, or knowledge of supplier default.

These facts strengthen reliance on decisions such as Safecon Lifescience, Sahil Enterprises, and Shanti Kiran, while also distinguishing cases where the Department alleges fake invoicing or collusive transactions.

Conclusion

Section 16(2)(c) of the CGST Act, 2017, represents one of the most debated provisions under the GST regime, balancing two competing objectives: protecting Government revenue and preserving the seamless flow of Input Tax Credit (ITC), which is the foundation of a value-added tax system. While the legislative intent behind the provision is to curb fake invoicing, fraudulent ITC claims, and tax evasion, its practical application has generated significant constitutional and commercial concerns, particularly where a bona fide purchaser is denied ITC solely due to the supplier’s default in depositing tax with the Government.

The judicial landscape reveals two distinct schools of thought. On one hand, decisions such as M/s Safecon Lifescience Pvt. Ltd. v. Additional Commissioner Grade-2 (Allahabad High Court), M/s Sahil Enterprises v. Union of India (Tripura High Court), and Shanti Kiran India Pvt. Ltd. v. Commissioner, Trade & Taxes Department (Delhi High Court) emphasize the principles of fairness, commercial reality, and protection of bona fide taxpayers. These decisions recognize that a recipient who has received the goods or services, paid the consideration including GST, and maintained proper documentation should not ordinarily suffer for the supplier’s subsequent default, particularly in the absence of fraud, collusion, or wilful participation.

On the other hand, the Gujarat High Court in Maruti Enterprise v. Union of India adopted a strict statutory interpretation and upheld the constitutional validity of Section 16(2)(c), holding that ITC is a statutory concession and that actual payment of tax by the supplier is an express legislative condition which cannot be diluted through judicial interpretation. The subsequent dismissal of the Special Leave Petition in Bhandari Scrap Traders v. Union of India by the Supreme Court has left the Gujarat High Court’s decision undisturbed; however, the dismissal being a non-speaking order does not constitute a declaration of law under Article 141 of the Constitution, nor does it finally resolve the divergence among the High Courts.

From a constitutional perspective, the controversy raises important questions under Articles 14, 19(1)(g), 265, and 300A. A literal application of Section 16(2)(c) may place an impossible burden upon an honest purchaser, who has neither statutory authority nor practical means to ensure that the supplier deposits the collected tax with the Government. Conversely, the State has a legitimate and compelling interest in preventing tax fraud and safeguarding public revenue. The challenge, therefore, lies not in choosing one objective over the other, but in striking a constitutionally sustainable balance between them.

The doctrine of reading down, as applied by the Tripura High Court in Sahil Enterprises, offers one possible reconciliation by preserving the constitutional validity of Section 16(2)(c) while limiting its operation to cases involving fraud, collusion, sham transactions, or conscious participation by the recipient. In contrast, the Gujarat High Court considered the statutory language to be clear and therefore not amenable to such interpretative modification. This divergence illustrates the continuing tension between literal statutory interpretation and purposive constitutional interpretation.

In the absence of an authoritative and reasoned pronouncement by the Supreme Court on the merits of Section 16(2)(c), the law continues to evolve. Until such clarity emerges, tax authorities should apply the provision in a fair, evidence-based, and proportionate manner, distinguishing genuine business transactions from fraudulent arrangements. Equally, taxpayers must strengthen supplier due diligence, maintain comprehensive documentary evidence, and demonstrate their bona fide conduct to protect their entitlement to ITC.

Ultimately, the success of the GST regime depends upon fostering certainty, fairness, and trust. Denying ITC to an innocent purchaser for reasons entirely beyond his control risks undermining these foundational principles and may dilute the very objective of creating a seamless credit chain under GST. At the same time, permitting unrestricted ITC in cases tainted by fraud would erode the integrity of the tax system. A balanced legal framework—one that effectively combats tax evasion while protecting honest taxpayers—will best serve the constitutional mandate of equality, certainty, and economic justice.

The final word on Section 16(2)(c) is yet to be spoken. Given the conflicting views of the High Courts and the absence of a reasoned decision of the Supreme Court on the merits, the issue remains open for authoritative determination. Such a decision will be crucial in harmonizing the objectives of revenue protection with the fundamental principles of fairness, commercial certainty, and the seamless flow of Input Tax Credit that underpin the GST framework.

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