ITC Eligibility – Satisfying condition that tax has actually been paid through cash or credit as envisaged u/s 16(2)(c) of the CGST ACT, 2017
A. Introduction
Input Tax Credit (ITC) forms the backbone of India’s Goods and Services Tax (GST) framework. It ensures that tax is levied only on value addition and not repeatedly at each stage of supply. However, ITC is not an absolute right; it is a conditional entitlement governed by Section 16 of the CGST Act, 2017. Among the conditions prescribed, Section 16(2)(c) has attracted considerable debate and litigation. It requires that the tax charged on a supply must have been actually paid to the government either in cash or through input tax credit before the recipient can claim ITC.
While the intention is to prevent revenue leakage through fake invoicing, in practice, this clause often places genuine taxpayers in difficult situations. This article seeks to unpack Section 16(2)(c), explore its challenges, and reflect on judicial and administrative responses.
B. Legal Provision:
“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;”
A plain reading of Section 16(2)(c) of the CGST Act indicates the following implications regarding eligibility to avail Input Tax Credit (ITC):
i) The recipient of goods or services must ensure that the supplier has duly discharged the output GST collected on the supply by issuing a valid tax invoice in compliance with the law.
ii) Where the supplier, for any reason, fails to remit the GST collected to the Government, and the burden of such non-payment by the supplier falls on the recipient, who stands to lose ITC legitimately attributable to him despite having paid the tax-inclusive consideration to the supplier.
C. Practical Verification by the Recipient:
The expression “actually paid” may be understood to mean that the tax collected by the supplier is ultimately credited to the Government’s account. To obtain reasonable assurance of such payment, the buyer can adopt the following measures:
a) Verify the authenticity of the supplier’s GST registration number.
b) Check whether the ITC is duly reflected in the buyer’s GSTR-2B, which would evidence that the supplier has filed his GSTR-1.
c) Confirm that the supplier has filed his GSTR-3B, thereby indicating that the corresponding tax liability has been discharged.
d) Maintain complete and proper documentation in respect of the purchase transaction including toll receipt, Lorry Receipt, E-way Bill [Wherever Applicable].
D. Jurisprudence in favour of Lawful Purchases by the Taxpayers:
a) M/s Safecon Lifescience Private Limited [2025 (9) TMI 919 – ALLAHABAD HIGH COURT]; The Order issued is quashed observing that actual movement of goods as well as payment of tax have been proved by the petitioner to which no rebuttal has been brought on record at any stage, proceedings under section 74 of the Act cannot be justified – Record shows that neither any finding with regard to fraud has been noticed nor mis-statement nor suppression of fact has been recorded at any stage.
In the case in hand the authorities have neither recorded any findings of fraud nor wilful misstatement nor suppression of fact to evade payment of tax, therefore, the proceedings under section 74 of the Act out not to have been initiated against the petitioner.
b) The Hon’ble Calcutta High Court in Suncraft Energy (P.) Ltd. v. Assistant Commissioner, State Tax, [2023] 153 taxmann.com 81 (Calcutta), held that where revenue reversed appellant’s input tax credit alleging non-reflection of supplier invoices in GSTR 2A, since appellant clarified compliance with Section 16(2) and payment via valid tax invoice and show cause notice faults appellant’s GSTR 1 not tax invoice possession or receipt, action against supplier essential before seeking reversal from appellant, and therefore order reversing ITC was to be set aside.
c) M/s Mina Bazar Railway Station Road vs State Tax Officer, 2023 Taxscan (HC) 1405- The petitioner’s input tax credit was denied based solely on discrepancies between GSTR 2A and GSTR 3B. The court, referencing previous judgments such as Diya Agencies v. The State Tax Officer and The State of Karnataka v. M/s Ecom Gill Coffee Trading Private Limited, held that denying input tax credit solely due to such discrepancies is unsustainable. The court remanded the matter to the Assessing Officer, directing them to consider evidence beyond GSTR 2A for the petitioner’s claim. The petitioner is required to present evidence supporting their claim for input tax credit, and the Assessing Authority must issue a fresh order in accordance with the law. This decision emphasizes the importance of considering all relevant evidence when assessing input tax credits under GST.
d) In Gargo Traders [2023] 151 taxmann.com 270 the Calcutta High Court held that ITC claim was rejected on ground of cancellation of registration of supplier with retrospective effect without considering whether documents relied on by petitioner was proper or not and that authority should consider petitioner’s grievance afresh.
e) In Arhaan Ferrous and Non-Ferrous Solutions (P.) Ltd. v. Deputy Assistant Commissioner-1(ST), 2023 (8) TMI 583, the Hon’ble Andhra Pradesh High Court held that responsibility of purchaser would be limited to extent of establishing that he bonafidely purchased goods from seller for valuable consideration by verifying GST registration of seller available on official web portal. It held that purchaser need not be aware of credentials and business activities of seller or about the fact that seller obtained GST registration by producing fake documents.
f) Calcutta High Court has in case of VISHAL KUMAR ARYA [2023 (4) TMI 249] held that input tax credit cannot be denied to the recipient of the goods or services merely on the basis of cancellation of the registration of the supplier retrospectively if it is proved that purchase of the goods/services is genuine.
g) In the case of LGW Industries Ltd. v. Union of India, [2022] 134 taxmann.com 42 (Calcutta), it was held that issue of entitlement to input tax credit was to be considered afresh. Payments along with tax actually paid to suppliers were to be verified. It was also to be verified as to whether transactions were made before cancellation of registration of suppliers. Benefit of ITC would be granted if purchases were genuine and purchases were supported by documents.
h) In Sanchita Kundu v. Assistant Commissioner of State Tax, [2022] 142 taxmann.com 576 (Calcutta), it is held that petitioner’s entitlement of benefit of Input Tax Credit should be decided by considering documents relied on for proving that all purchases and transactions in question were genuine and transactions in question were made before cancellation of registration of suppliers.
i) The Hon’ble High Court of Orissa in Bright Star Plastic Industries v. Additional Commissioner of Sales Tax [2021] 132 taxmann.com 146 held that registration of purchasing dealer cannot be cancelled for fraud committed by the selling dealer. It held that cancellation of registration is not sustainable when department has failed to prove that ITC was availed with full knowledge of seller being non-existent.
j) In Sri Ranganathar Valves (P.) Ltd. v. Assistant Commissioner (CT) (FAC), [2020] 120 taxmann.com 345 (Madras), it is held that Input tax credit cannot be disallowed on ground that seller has not paid tax to Government, when purchaser is able to prove that seller has collected tax and issued invoices to purchaser.
k) The Hon’ble High Court of Madras in M/s. D.Y. Beathel Enterprises v The State Tax Officer,P. (MD) No 2127 of 2021 dated 24.02.2021 has held that the department should proceed against the selling dealer first in cases where the supplier has collected tax from the purchasing dealer. In fact, State is empowered to collect or recover taxes. The state cannot shred away from its duty to collect tax nor can it pass on its duty to the taxpayers. By passing the buck of enforcing tax payment to purchasers, the state is shredding away from its duties.
l) The Hon’ble High Court of Punjab and Haryana in M/s Gheru Lal Bal Chand vs The State of Haryana and another, (2011) 45 VST 195, held that no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or its predecessors with the purchasing registered dealer is established.
E. Way Forward for Taxpayers:
Taxpayers can mitigate risks through proactive compliance:
- Vendor Due Diligence: Assess supplier compliance history before transactions.
- Contractual Safeguards: Include indemnity and GST compliance clauses in agreements.
- Regular Reconciliation: Match purchase records with GSTR-2B to detect mismatches early.
- Maintain Documentation: Preserve invoices, transport documents, and proof of payment.
- Engage with Authorities: Where disputes arise, provide evidence of bona fide compliance.
F. Conclusion:
Section 16(2)(c) sits at the heart of an ongoing tug-of-war: on one side, the government’s genuine intent to prevent tax evasion, and on the other, the everyday reality of honest businesses caught in complexities they cannot fully control. While the law tries to protect revenue, its rigid application sometimes ends up passing the burden onto those who are actually playing by the rules. Courts too have mirrored this dilemma – some decisions giving relief to genuine taxpayers, others upholding the strict letter of the law.
What helps here is being proactive: building stronger relationships with vendors, tightening reconciliation checks, and placing contractual safeguards that secure ITC claims from avoidable disputes.
At the end of the day, GST was envisioned as a tax system that is “good and simple.” The real way forward is to refine the framework so that it protects revenue without penalising the compliant. When that balance is struck, it won’t just ease compliance – it will strengthen the trust in the system.
Author Bio
IT IS REALLY A VERY EFFECTIVE ARTICLE IN TRUE SENSE IN WHICH NUMBER OF FAVOURABLE JUDGMENT OF REGISTERED PERSON IN ONE ARTICLE AND EXPREES IN A GOOD SENSE.