Portal Data Is Not Fraud: Why Blanket ITC Reversal Against Genuine Buyers Cannot Be Sustained

Summary: The article examines the contention that a genuine GST recipient cannot be subjected to blanket reversal of input tax credit merely because a supplier was subsequently tagged as NGSTP, treated as non-genuine, or subjected to cancellation proceedings. It distinguishes Section 74, applicable to the material period up to FY 2023-24, from Section 74A, applicable from FY 2024-25 onwards. The article argues that allegations of fraud, wilful misstatement or suppression should be supported by buyer-specific evidence rather than merely by supplier-side status or portal-generated ITC figures. It discusses the recipient’s requirements under Section 16 of the CGST Act, including possession of prescribed documents and receipt of goods or services. The article further discusses FORM GST DRC-01A, the need for transaction-specific investigation, and documentary evidence such as invoices, e-way bills, transport records, bank payments, stock records and return disclosures. It concludes that a supplier’s subsequent non-compliance, cancellation or NGSTP status, without corresponding evidence against the recipient, should not by itself establish fraud or justify blanket ITC reversal.

Introduction: A GST notice cannot call a transaction “fraud”, “wilful misstatement” or “suppression” merely because the supplier was later tagged as NGSTP, treated as non-genuine, or subjected to Suo motu cancellation of registration. When the buyer has disclosed the purchases, taken credit through regular returns, produced invoices, e-way bills, banking trail, books of account and proof of receipt/use of goods, the department must first bring positive evidence against that buyer.

For FY 2023-24 and earlier, the fraud-based provision is Section 74. For FY 2024-25 onwards, the common determination provision is Section 74A; fraud, wilful misstatement or suppression affects the quantum of penalty under Section 74A(5)(ii), but those serious allegations must still be supported by facts and evidence—not by a computer-generated list of buyer-wise ITC figures downloaded from the GST portal.

The real issue

In many cases, the department obtains a report that certain suppliers are tagged as non-genuine / NGSTP or are proposed for Suo motu cancellation of registration. Thereafter, instead of investigating the actual transactions, officers download the purchaser’s GSTR-2A/2B, GSTR-1, GSTR-3B and e-way-bill data, paste the figures into a DRC-01A or show-cause notice, and propose reversal of the entire ITC relating to such suppliers.

This approach has a basic legal defect.

The GST portal itself contains the very disclosures which the department later describes as “suppression”:

The supplier has uploaded outward supplies in GSTR-1.

The invoices have reflected in the recipient’s GSTR-2A/2B.

The buyer has disclosed ITC in GSTR-3B.

E-way bills record the stated movement of goods.

Credit notes or debit notes, where issued, are already on the portal.

The buyer’s books, tax invoices, transport documents and banking payments can be verified.

TDS, where applicable, is reflected through the statutory system.

When all primary facts are already declared, reflected and electronically available to the department, the officer cannot merely use the word “suppression” without identifying which fact was not declared by the buyer, and how that non-declaration was intended to evade tax.

What Section 74 and Section 74A require

For transactions up to FY 2023-24, Section 74 applies only where tax has not been paid, short paid, refunded erroneously, or ITC has been wrongly availed or utilised by reason of fraud, wilful misstatement or suppression of facts. It is a serious provision carrying penalty equal to tax in the notice and order framework.

For FY 2024-25 onwards, Section 74A applies to determination of tax/ITC for any reason. However, Section 74A itself clearly differentiates between ordinary cases and fraud cases:

Nature of alleged default	Section 74A consequence
Any reason other than fraud, wilful misstatement or suppression to evade tax	Penalty: 10% of tax or ₹10,000, whichever is higher
Fraud, wilful misstatement or suppression of facts to evade tax	Penalty equal to tax

Section 74A (9) is only a payment-and-conclusion provision for a case already alleged to involve fraud, wilful misstatement or suppression. It is not an independent authority to label every supplier-side discrepancy as fraud by the recipient. Under Section 74A(9)(ii), payment within 60 days of the notice entails tax, interest and 25% penalty; under Section 74A(9)(iii), payment within 60 days of the order entails tax, interest and 50% penalty. These provisions show why a fraud allegation cannot be casually made: the allegation has drastic civil consequences.

The statute also defines “suppression”. It means non-declaration of facts or information required to be declared in a return, statement, report or other document, or failure to furnish information sought in writing by the proper officer. Thus, where purchase invoices, ITC, returns and related transaction data were declared or auto-reflected on the GST portal, the department must state precisely what the buyer failed to declare.

Fraud cannot be created from portal figures

Fraud is not a difference in data. Fraud is not a supplier cancellation order. Fraud is not an NGSTP tag. Fraud is not an officer’s suspicion. Fraud is not an Excel sheet downloaded from GSTR-2B.

A fraud allegation against a recipient should be supported by material such as:

Evidence that no goods were actually received.

Evidence that transport documents or e-way bills are fabricated.

Evidence that payment shown through banking channels is circular, accommodation-based or returned in cash.

Evidence of a common person, common control, common mobile number, common IP address, common premises or money trail connecting buyer and supplier.

Admission or statement directly involving the buyer, with an opportunity for cross-examination where the statement is relied upon.

Evidence that the buyer knew, or deliberately participated in, invoice trading or wrongful ITC passing.

Proof that the documents and books produced by the buyer are false.

Without such evidence, the conclusion that a genuine buyer committed fraud merely because the supplier later became unavailable, defaulted in tax payment, failed to file returns, or faced retrospective cancellation is not a finding—it is only an assumption.

A supplier may later become non-compliant for many reasons: closure of business, financial failure, non-filing, mismatch, cancellation proceedings, address change, internal dispute or tax default. The later status of the supplier does not erase a purchase that was made when the supplier was registered, issued a tax invoice, generated e-way bill and supplied goods.

The defect in a “copy-paste” notice

A valid show-cause notice must disclose the allegation, legal basis and material relied upon. It cannot simply reproduce buyer-wise figures and demand reversal of all ITC for an entire year.

If a notice says:

“The supplier is NGSTP / registration is proposed for cancellation; therefore, all ITC availed by the recipient is fraudulent and liable for reversal under Section 74 or Section 74A(5)(ii).”

then the notice must answer the following questions:

What is the evidence that goods were not received by this particular buyer?

Which invoice is alleged to be fake, and for what reason?

Which e-way bill is alleged to be false, and what field enquiry disproves actual movement?

What enquiry was conducted at the buyer’s premises, godown, factory, project site or place of business?

What stock records, inward register, gate register, freight record or consumption record was examined?

What bank payment is alleged to be sham, circular or returned?

What material establishes knowledge, collusion or connivance of the buyer?

Which material fact was suppressed by the buyer despite statutory disclosure?

How is the statutory condition of Section 16 not fulfilled in each invoice-wise transaction?

Why is Section 74 or the fraud limb of Section 74A invoked instead of the normal provision?

Unless the notice deals with these questions, it does not disclose a sustainable fraud case.

Illustration

Example: Genuine buyer, later-defaulting supplier

M/s A Traders purchases electrical material worth ₹1 crore plus GST of ₹18 lakh from M/s B Enterprises in June 2024.

At the time of supply:

B Enterprises holds an active GST registration.

B issues a tax invoice.

B uploads the invoice in GSTR-1.

The invoice appears in A Traders’ GSTR-2B.

A Traders pays through bank transfer.

E-way bill is generated.

Goods reach A Traders’ warehouse.

A Traders records goods in inward register and stock register.

ITC of ₹18 lakh is disclosed in GSTR-3B.

Goods are used in taxable outward supply.

In December 2025, B Enterprises is tagged NGSTP and its registration is cancelled, possibly with retrospective effect. The department then issues DRC-01A to A Traders, proposing reversal of ₹18 lakh with interest and fraud penalty.

The correct enquiry is not: “Was B later cancelled?”

The correct enquiry is:

“Did A Traders actually receive the goods? Did it pay the supplier? Are the invoice, e-way bill, transport record, stock record and bank trail genuine? Is there evidence that A Traders knew that B was issuing accommodation invoices?”

If the buyer establishes genuine receipt, payment, tax invoice, e-way bill, business use and regular return disclosure, then the later supplier-side action alone cannot establish fraud, wilful misstatement or suppression by A Traders.

Burden cannot be shifted blindly

The recipient must certainly establish the basic requirements of Section 16: possession of tax invoice or prescribed document, receipt of goods or services, return compliance and other applicable statutory conditions. The buyer should therefore produce complete evidence.

But once the buyer produces primary evidence—invoice, e-way bill, transport proof, bank payment, stock/inward records, ledger, GSTR-2B and return disclosure—the department cannot reject it by merely saying that the supplier is non-genuine.

The department must then conduct a real investigation and confront the buyer with contrary material. A tax demand running into crores cannot rest on a spreadsheet, system tag, or a portal download. The demand must rest on transaction-specific evidence.

This is particularly important where the alleged ITC is claimed to be fictitious. A fictitious transaction normally leaves no goods, no movement, no payment, no inward record, no use in business and no corresponding commercial trail. If the entire commercial trail exists and remains uncontroverted, a blanket conclusion of “fake ITC” is legally weak.

Suggested reply in DRC-01A

Subject: Reply to FORM GST DRC-01A – Proposed reversal of ITC and proposed invocation of Section 74A(5)(ii) / Section 74

To The Proper Officer [Jurisdiction / Division]

GSTIN: [●] Tax Period: [●] Reference No. and date of DRC-01A: [●]

Sir/Madam,

With reference to the above DRC-01A, the taxpayer submits that the proposed demand is based mainly on supplier-wise ITC figures downloaded from the GST portal and on the alleged NGSTP tagging / proposed or subsequent Suo motu cancellation of the suppliers’ registrations.

The proposed demand is not maintainable either on facts or in law. The notice does not identify any evidence showing that the taxpayer availed ITC without receipt of goods or services, used fake invoices, made bogus payment, fabricated e-way bills, or entered into any arrangement with the suppliers for wrongful availment of ITC.

1. All transaction particulars were disclosed

The transactions proposed in the DRC-01A are fully disclosed and traceable in the statutory records and GST portal:

Tax invoices were issued by registered suppliers.

The suppliers uploaded the relevant invoices in GSTR-1.

The ITC was reflected in the taxpayer’s GSTR-2A/GSTR-2B.

The taxpayer disclosed eligible ITC in GSTR-3B.

E-way bills were generated for movement of goods.

The purchases are recorded in books of account, purchase register and supplier ledger.

Payments were made through banking channels.

Goods were received and recorded in inward/stock records and used in the course or furtherance of business.

Relevant debit notes, credit notes and other documents, wherever applicable, are also duly accounted for.

Thus, the entire transaction trail is before the department. No material fact was withheld by the taxpayer.

2. Fraud, wilful misstatement and suppression are not established

For invoking Section 74 for FY 2023-24 and earlier, the department must establish fraud, wilful misstatement or suppression of facts with intent to evade tax. Likewise, for imposing fraud-equivalent penalty under Section 74A(5)(ii) for FY 2024-25 onwards, the department must first establish such ingredients against the taxpayer.

The DRC-01A does not state:

Any false statement made by the taxpayer;

Any fact required to be declared but not declared by the taxpayer;

Any written information sought and not furnished by the taxpayer;

Any evidence of collusion, connivance, circular trading or cash-back arrangement;

Any evidence that goods were not received;

Any evidence that the e-way bills, invoices, transport documents or bank payments are false.

A supplier-side tag, later default or retrospective cancellation cannot, by itself, constitute fraud or suppression by the purchaser.

3. Supplier’s subsequent cancellation is not proof against buyer

The taxpayer purchased goods from suppliers who were registered on the date of transaction. The taxpayer acted on documents available in the statutory GST system and complied with the ordinary commercial and GST documentation requirements.

The subsequent cancellation, proposed cancellation or alleged non-genuine status of a supplier cannot retrospectively convert a genuine purchase into a fraudulent purchase of the recipient. The department must independently establish that the taxpayer knew of, participated in, or benefited from any alleged fraud.

No such evidence has been supplied.

4. Request for relied-upon documents and detailed basis

The taxpayer requests the department to provide:

Complete NGSTP / intelligence / survey report relied upon;

Supplier-wise and invoice-wise basis for treating ITC as ineligible;

Statements, enquiry reports, inspection reports and third-party material relied upon;

Details of any field verification conducted at the taxpayer’s place of business, warehouse, factory or project site;

Details of alleged non-movement of goods;

Details of alleged financial trail, cash-back or circular transaction;

Copy of the supplier cancellation order and material forming its basis;

Opportunity to cross-examine any person whose statement is relied upon.

Without supply of relied-upon documents and meaningful opportunity to rebut the material, no adverse conclusion may be drawn.

5. Request for dropping the proposed demand

The proposed demand is based on presumption and not on evidence. The figures referred to in the notice are already disclosed figures from the GST portal and cannot be treated as evidence of concealment or fraud.

The taxpayer therefore requests that the proposed proceedings under Section 74 / Section 74A(5)(ii) be dropped in full. Without prejudice, if the department still considers any invoice to be ineligible, the same may be examined invoice-wise after supplying all relied-upon material and after considering the taxpayer’s documentary evidence of actual receipt, payment and business use.

Yours faithfully, For [Name of Taxpayer] Authorised Signatory Date: [●] Place: [●]

Documents to annex

The reply should not remain only a legal reply. Attach a well-indexed invoice-wise reconciliation to make the facts impossible to ignore.

GSTR-2B reconciliation with purchase register.

GSTR-3B reconciliation with ITC ledger.

Supplier-wise invoice list.

Purchase orders and agreements, where available.

Tax invoices.

E-way bills.

LR/GR, transporter receipt, delivery challan and proof of delivery.

Gate-entry register, inward register, weighbridge slips and warehouse records, where applicable.

Stock register, material consumption register, production record or project-use record.

Bank statement with payment entries highlighted.

Supplier ledger confirmation, if available.

GSTR-1/GSTR-3B extracts of the taxpayer.

Photographs, site records or customer-linked records, where goods were directly delivered to a project site.

Affidavit or certificate from transporter/warehouse personnel, if facts require it.

Conclusion

The GST system is built on electronic disclosure. It is legally contradictory for the department to use the taxpayer’s own GST portal disclosures as the basis of a fraud allegation, without identifying any undisclosed fact, any false document, any non-receipt of goods, any sham payment or any collusion.

A supplier’s NGSTP tag, non-filing, later tax default or Suo motu cancellation may justify investigation. It does not by itself justify reversal of the bona fide buyer’s entire ITC, much less a fraud penalty equal to tax. A genuine investigation must start from physical and commercial facts: receipt of goods, movement, payment, stock, consumption, accounts and the buyer’s knowledge. It cannot end with a downloaded portal figure and a paper demand in crores.