Summary: The article examines Section 76 of the CGST Act, 2017, concerning tax collected by a person but not paid to the Government, and argues that the provision should be used against defaulting suppliers instead of denying Input Tax Credit (ITC) to bona fide purchasers. It highlights Section 76(1)–(7), including the obligation to pay collected tax, penalty, interest, adjudication timeline and refund adjustment mechanism. The article refers to judicial decisions including M/s R.K. Transport & Constructions Ltd. vs. State of Jharkhand, M/s Narsingh Ispat Ltd. vs. State of Jharkhand, National Plasto Moulding, On Quest Merchandising India Pvt. Ltd., and Shanti Kiran India Pvt. Ltd., stating that courts have addressed supplier defaults and ITC denial. It proposes taxpayer measures such as documentation, departmental representations and writ proceedings, and recommends departmental reforms including coordinated action against defaulting suppliers, training, performance reforms and inter-jurisdictional coordination. It also suggests legislative and policy measures concerning Section 76, bona fide purchasers, adjudication timelines, departmental accountability, refunds, a GST Ombudsman and natural justice safeguards.
Section 76 of GST: The Forgotten Weapon Against Tax Evasion – Why the Department Ignores It While Innocent Buyers Suffer
A Systemic Failure in GST Enforcement
Since the implementation of GST in July 2017, a disturbing pattern has emerged in the enforcement machinery of the Goods and Services Tax regime. While the statute provides a comprehensive framework to combat tax evasion, the GST department has consistently chosen the path of least resistance: denying Input Tax Credit (ITC) to bona fide purchasers rather than pursuing the actual defaulters—the suppliers who collect tax but never remit it to the Government. This approach not only violates the principles of natural justice but also defeats the very purpose of GST as a destination-based consumption tax.
The question that every tax practitioner, taxpayer, and policymaker must confront is stark: Why has Section 76 of the CGST Act, 2017—a powerful provision specifically designed to recover tax collected but not paid—remained virtually unused for nearly nine years? Why do tax officers issue show cause notices under Sections 73 and 74 to innocent buyers while the actual defaulting suppliers operate with impunity, often continuing their business without any serious consequences?
This article examines Section 76 in detail, analyses the judicial response to departmental inaction, and proposes concrete remedies for both the department and taxpayers to restore balance to the GST enforcement regime.
Section 76 of the CGST Act, 2017: Text and Interpretation
Statutory Provision
Section 76 of the Central Goods and Services Tax Act, 2017 reads as follows:
Section 76. Tax collected but not paid to Government.
(1) Notwithstanding anything to the contrary contained in any order or direction of any Appellate Authority or Appellate Tribunal or court or in any other provisions of this Act or the rules made thereunder or any other law for the time being in force, every person who has collected from any other person any amount as representing the tax under this Act, and has not paid the said amount to the Government, shall forthwith pay the said amount to the Government, irrespective of whether the supplies in respect of which such amount was collected are taxable or not.
(2) Where any amount is required to be paid to the Government under sub-section (1), and which has not been so paid, the proper officer may serve on the person liable to pay such amount a notice requiring him to show cause as to why the said amount as specified in the notice should not be paid by him to the Government and why a penalty equivalent to the amount specified in the notice should not be imposed on him under the provisions of this Act.
(3) The proper officer shall, after considering the representation, if any, made by the person on whom notice is served under sub-section (2), determine the amount due from such person and thereupon such person shall pay the amount so determined.
(4) The person referred to in sub-section (1) shall, in addition to paying the amount referred to in sub-section (1) or sub-section (3), also be liable to pay interest thereon at the rate specified under section 50 from the date such amount was collected by him to the date such amount is paid by him to the Government.
(5) The amount referred to in sub-section (1) or sub-section (3) shall be adjusted against the amount of refund admissible to the person referred to in sub-section (1) under section 54, and where the amount so recovered is in excess of the amount of refund admissible, the excess amount shall be refunded to the person referred to in sub-section (1).
(6) No order under sub-section (3) shall be passed after the expiry of one year from the date of issue of the notice under sub-section (2).
(7) The provisions of sub-section (6) shall not apply in case of any order passed by the Appellate Authority or Appellate Tribunal or court.
Key Features of Section 76
Non-Obstante Clause: The opening words “Notwithstanding anything to the contrary” make Section 76 overriding and supreme over all other provisions of the Act, including Sections 73 and 74. This means that even if proceedings under Sections 73 or 74 are time-barred or otherwise defective, Section 76 remains fully operative.
Universal Application: The phrase “every person who has collected” is deliberately broad. It covers:
Registered suppliers who collected GST but failed to file returns or deposit tax
Unregistered persons who collected tax (even if the supply was exempt or non-taxable)
Suppliers registered under CGST when action is taken by SGST authorities (and vice versa)
Mandatory Payment Obligation: The defaulting person “shall forthwith pay” the collected amount to the Government. This is not a discretionary provision—it creates an immediate statutory obligation.
Penalty Equal to Tax Amount: Sub-section (2) empowers the proper officer to impose a penalty equivalent to the tax amount not paid. This is a severe deterrent, effectively doubling the financial liability of the defaulter.
Interest Liability: Under sub-section (4), interest at the rate specified in Section 50 (currently 18% per annum) is payable from the date of collection until the date of actual payment to the Government.
Time Limit for Adjudication: Sub-section (6) mandates that the adjudication order must be passed within one year from the date of the show cause notice. This ensures expeditious resolution.
Refund Mechanism: Sub-section (5) provides that if the purchaser (who bore the tax burden) is otherwise eligible for refund under Section 54, the amount recovered from the defaulting supplier can be adjusted against such refund, with any excess refunded to the purchaser.
Why Section 76 Remains Unused: A Critical Analysis
Despite its comprehensive framework, Section 76 has been conspicuously absent from GST enforcement for the following reasons:
1. Administrative Convenience Over Legal Obligation
Tax authorities have adopted a shortcut approach: instead of identifying and pursuing defaulting suppliers (which requires investigation, tracing assets, and potentially complex recovery proceedings), they simply deny ITC to purchasers. This shifts the burden of proof and recovery onto the buyer, who is often easier to locate and coerce into payment.
2. Misplaced Focus on Revenue Collection Targets
GST officers are often evaluated based on revenue recovery targets. Denying ITC to purchasers yields immediate revenue (as the buyer must reverse ITC and pay tax with interest), whereas pursuing defaulting suppliers under Section 76 involves lengthy adjudication, potential litigation, and uncertain recovery. This creates a perverse incentive to target innocent buyers rather than actual defaulters.
3. Jurisdictional Excuses
As revealed in the Jharkhand High Court judgment in M/s R.K. Transport & Constructions Ltd. vs. State of Jharkhand (W.P.(T) No. 1624 of 2024, dated 13.06.2025), GST authorities frequently claim they cannot act against suppliers registered under CGST jurisdiction when the purchaser falls under SGST jurisdiction. The Court categorically rejected this argument, holding that Section 76 applies to “every person” regardless of registration type. Yet, this excuse continues to be used to avoid action.[
4. Lack of Awareness or Wilful Ignorance
Many tax officers are either unaware of Section 76’s potency or deliberately ignore it. The provision is rarely cited in show cause notices, and training programs for GST officers do not emphasize its use. This institutional ignorance perpetuates the cycle of inaction.
5. Collusion and Corruption
In some cases, defaulting suppliers may have informal arrangements with local tax officials, allowing them to continue collecting tax without remitting it. Meanwhile, purchasers—who lack such connections—bear the brunt of enforcement.
Judicial Response: Courts Step In to Protect Taxpayers
The judiciary has consistently condemned the department’s failure to invoke Section 76 and has laid down clear principles to protect bona fide purchasers.
1. M/s R.K. Transport & Constructions Ltd. vs. State of Jharkhand (Jharkhand HC, 13.06.2025)
Facts: The petitioner purchased vehicle rental services and paid GST of ₹11.18 lakh to the supplier. The supplier neither filed GSTR-1 nor deposited the tax with the Government. As a result, the petitioner’s ITC did not reflect in GSTR-2A, and the department refused to allow the credit.
Held: The Jharkhand High Court held:
Section 76(1) and (2) place an obligatory responsibility on the proper officer to act against “every person” who collects tax but fails to remit it.
The excuse that the supplier is registered under CGST jurisdiction while the purchaser is under SGST jurisdiction is legally unsustainable.
The department was directed to initiate Section 76 proceedings against the defaulting supplier within 8 weeks.
The defaulting supplier was ordered to pay ₹1,00,000 as costs to the petitioner for the department’s inaction.
Significance: This judgment establishes that jurisdictional technicalities cannot shield defaulting suppliers and that Section 76 must be invoked as a matter of statutory duty.
2. M/s Narsingh Ispat Ltd. vs. State of Jharkhand (Jharkhand HC, 11.07.2024)
Facts: Similar to the above case, the petitioner faced ITC denial due to supplier default.
Held: The Court reiterated:
Section 76 empowers the State Authority to take action against any person who has collected tax but not paid it to the Government, regardless of whether the supplier is registered under Central or State jurisdiction.
The recipient (buyer) should not suffer because of the supplier’s fraud or non-compliance.
The State GST department was directed to act within 8 weeks, and ₹1,00,000 costs were imposed on the defaulting supplier.
3. National Plasto Moulding (Gauhati HC Division Bench)
The Gauhati High Court held that a bona fide purchasing dealer cannot be denied ITC solely due to the supplier’s failure to deposit tax. The Court emphasized that action must be taken against the defaulting supplier under Section 76, and ITC denial to the purchaser is arbitrary unless collusion is proven.
4. On Quest Merchandising India Pvt. Ltd. (Delhi HC, affirmed by Supreme Court)
The Delhi High Court ruled that where the purchaser has:
Bought from a duly registered dealer
Paid tax in good faith
Possessed proper invoices
ITC cannot be denied merely because the supplier failed to deposit tax. The Supreme Court’s affirmation of this principle reinforces the taxpayer-friendly approach.
5. Shanti Kiran India Pvt. Ltd. (Supreme Court, 09.10.2025)
The Supreme Court affirmed that ITC cannot be denied to a purchaser who acted in good faith and complied with all statutory requirements. The Court held that the proper remedy lies against the defaulting supplier, not the innocent purchaser.
The Human Cost: Real-World Impact on Genuine Taxpayers
The department’s refusal to invoke Section 76 has devastating consequences for honest businesses:
Cash Flow Crisis: When ITC is denied, businesses must pay additional tax from their working capital, often leading to liquidity problems.
Double Taxation: The purchaser pays tax to the supplier, who does not remit it. When ITC is denied, the purchaser effectively pays tax twice—once to the supplier and once to the Government.
Litigation Burden: Taxpayers are forced to spend lakhs on legal fees to fight departmental orders, diverting resources from productive business activities.
Reputational Damage: Show cause notices and adjudication orders create a stigma, affecting the taxpayer’s ability to secure loans, contracts, and business partnerships.
Psychological Stress: The constant threat of penalties, interest, and prosecution takes a severe toll on business owners and their families.
Remedies for Taxpayers: A Strategic Approach
Taxpayers facing ITC denial due to supplier default should adopt the following strategy:
1. Pre-Emptive Documentation
Before any dispute arises, maintain:
Tax invoices with supplier’s GSTIN
Bank payment records (avoid cash transactions above ₹10,000)
E-way bills and transport documents
Delivery acknowledgments and stock entries
Email correspondence with suppliers regarding tax compliance
Supplier’s registration status verification at the time of transaction
2. Representation to the Department
When facing ITC denial, submit a detailed representation citing:
Section 76 as the appropriate remedy against the supplier
Jharkhand HC judgments (R.K. Transport, Narsingh Ispat)
Gauhati HC ruling (National Plasto Moulding)
Supreme Court precedents (Shanti Kiran, On Quest)
Prayer to initiate Section 76 proceedings against the supplier
Request for action-taken report on supplier proceedings
3. Writ Petition Before High Court
If the department refuses to act, file a writ petition under Article 226 of the Constitution seeking:
Quashing of ITC denial order
Direction to initiate Section 76 proceedings against the supplier
Costs for departmental inaction
Interim stay on recovery proceedings
4. Complaint to Higher Authorities
Escalate the matter to:
Chief Commissioner of GST
Central Board of Indirect Taxes and Customs (CBIC)
Lokpal or State Lokayukta (if corruption is suspected)
Parliamentary Standing Committee on Finance (for systemic issues)
5. Public Interest Litigation (PIL)
In cases of widespread departmental inaction, consider filing a PIL highlighting the systemic violation of Section 76 and its impact on genuine taxpayers.
Remedies for the Department: A Call for Reform
The GST department must urgently address its enforcement failures by adopting the following measures:
1. Mandatory Section 76 Invocation
Issue a circular or instruction mandating that:
Before denying ITC to a purchaser, the department must initiate Section 76 proceedings against the defaulting supplier.
The show cause notice to the purchaser must include a report on action taken against the supplier.
ITC denial orders without Section 76 action against the supplier are presumptively arbitrary.
2. Centralized Defaulting Supplier Database
Create a national database of suppliers who:
Have collected tax but failed to file returns
Have outstanding tax demands under Section 76
Have been prosecuted for GST fraud
This database should be accessible to all GST officers to enable coordinated enforcement.
3. Performance Metrics Reform
Change the evaluation criteria for GST officers to reward:
Recovery from actual defaulters (not ITC reversals from purchasers)
Number of Section 76 proceedings initiated and concluded
Reduction in pending cases involving supplier defaults
4. Training and Capacity Building
Conduct mandatory training programs for GST officers on:
Section 76 interpretation and application
Judicial precedents protecting bona fide purchasers
Investigation techniques for tracing defaulting suppliers
Recovery procedures under the Act
5. Inter-Jurisdictional Coordination
Establish a formal mechanism for CGST and SGST authorities to:
Share information on defaulting suppliers
Coordinate Section 76 proceedings
Avoid jurisdictional disputes that delay enforcement
6. Whistleblower Incentives
Introduce a reward system for informants who provide credible information on suppliers collecting tax but not remitting it. This could significantly enhance detection and recovery.
Suggestions to the Government: Legislative and Policy Interventions
To address the systemic issues in GST enforcement, the Government should consider the following measures:
1. Amendment to Section 76
Insert a mandatory precondition in Section 73 and 74 proceedings:
No ITC denial order shall be passed against a purchaser unless the department has first initiated Section 76 proceedings against the defaulting supplier.
The adjudication order must include a finding on Section 76 action taken against the supplier.
2. Presumption of Bona Fides
Amend the Act to create a rebuttable presumption that:
Where a purchaser has paid tax to a registered supplier and possesses proper invoices, the transaction is presumed genuine.
The burden shifts to the department to prove collusion or fraud before denying ITC.
3. Time-Bound Adjudication
Introduce stricter timelines:
Section 76 proceedings must be concluded within 6 months (instead of 1 year) to ensure swift recovery.
Failure to adjudicate within the timeline results in automatic quashing of the show cause notice.
4. Enhanced Penalties for Departmental Inaction
Insert a provision for departmental accountability:
Officers who fail to invoke Section 76 despite clear evidence of supplier default shall face disciplinary action.
Taxpayers who suffer loss due to departmental inaction may claim compensation from the Government.
5. Simplified Refund Mechanism
Amend Section 54 to allow:
Direct refund to purchasers who have borne the tax burden due to supplier default.
The Government can then recover from the supplier separately under Section 76.
6. GST Ombudsman
Establish an independent GST Ombudsman to:
Investigate complaints of departmental inaction or harassment
Recommend corrective action and compensation
Submit annual reports to Parliament on systemic issues
7. Natural Justice Safeguards
Incorporate explicit natural justice principles in the Act:
No order adverse to a taxpayer shall be passed without considering alternative remedies against the actual defaulter.
Taxpayers have a right to be heard on why Section 76 should be invoked against the supplier before ITC is denied.
Conclusion: Restoring Balance to GST Enforcement
The continued neglect of Section 76 by the GST department represents a fundamental failure of the tax administration to uphold the principles of natural justice, fairness, and proportionality. While the statute provides a robust mechanism to recover tax from defaulting suppliers, the department’s preference for targeting innocent purchasers has created a culture of impunity for fraudsters and harassment for honest taxpayers.
The judiciary has repeatedly intervened to correct this imbalance, but court orders alone cannot fix a broken system. What is needed is a paradigm shift in the department’s approach:
From denying ITC to purchasers to pursuing defaulting suppliers under Section 76.
From revenue targets at any cost to fair and equitable enforcement.
From jurisdictional excuses to coordinated action against tax evaders.
From indifference to taxpayer hardship to accountability and responsiveness.
The Government must act swiftly to amend the law, reform administrative practices, and restore public confidence in the GST regime. As the Jharkhand High Court aptly observed: “Jurisdiction is not a defense when tax has been collected but not remitted.” This principle must guide every GST officer in the discharge of their duties.
For taxpayers, the message is clear: Do not accept ITC denial as inevitable. Arm yourself with knowledge of Section 76, cite the relevant case law, and demand that the department fulfil its statutory obligation to act against the actual defaulters. The law is on your side—use it wisely.
Key Takeaways for Practitioners
Section 76 is a non-obstante provision—it overrides all other sections and must be invoked before ITC denial.
Jurisdictional excuses are invalid—CGST/SGST authorities can act against any defaulting supplier.
Courts are taxpayer-friendly—cite Jharkhand HC, Gauhati HC, and Supreme Court precedents in representations.
Document everything—maintain comprehensive records to prove bona fides.
Escalate strategically—use writ petitions, complaints to higher authorities, and PILs when necessary.
Demand accountability—push for departmental reforms through professional bodies and parliamentary channels.
The time has come to make Section 76 the cornerstone of GST enforcement, not the forgotten provision it has been for the past nine years. Only then will the GST regime truly serve its purpose: to tax consumption, not punish honesty.
