The Doctrine of Statutory Prerogative: An Expanded Analysis of the Gujarat High Court’s Verdict on Section 16(2)(C) of CGST Act 2017

The Doctrine of Statutory Prerogative: An Expanded Analysis of the Gujarat High Court’s Verdict on Section 16(2)(C) of CGST Act 2017

The dawn of the Goods and Services Tax (GST) in July 2017 was marked a watershed moment which heralded as the definitive “One Nation, One Tax” reform, aimed at dismantling archaic barriers of cascading taxes in the country’s fiscal history. At the heart of this tax architecture lies the Input Tax Credit (ITC) mechanism, which is designed to eliminate the cascading effect of taxes by allowing businesses to claim credit for taxes paid on inputs. However, the practical implementation of this mechanism has not been without its challenges. One of the most contentious provisions in this context is Section 16(2)(c) of the Central Goods and Services Tax (CGST) Act, 2017 which conditions the availment of ITC on the actual payment of tax by the supplier to the Government. The Gujarat High Court’s recent verdict in Maruti Enterprise vs. Union of India vide Petition No: C/SCA/18080/2023, dated 01^st May 2026 has brought this provision under intense judicial scrutiny, raising critical questions about the balance between tax compliance and constitutional rights.

Background: GST and ITC Mechanism:-

The GST framework is predicated on the principle of value addition, where tax is levied only on the value added at each stage of the supply chain. To operationalize this, the ITC mechanism allows businesses to offset the tax they pay on inputs against the tax they collect on outputs. This ensures that the tax burden is ultimately borne by the end consumer, while businesses act as intermediaries in the tax collection process. The provisions of Section 16 of the CGST Act, 2017 lays down the eligibility criteria for claiming ITC. Among these, Section 16(2)(c) has emerged as a significant point of contention.

Section 16. Eligibility and conditions for taking input tax credit.-

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

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 to him unless, –

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;

(b) he has received the goods or services or both.

Explanation.- For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services-

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person;]

(ba) the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted;]

(c) 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; and

(d) he has furnished the return under section 39:

Therefore, it is evident here that the provisions of Section 16(2)(c) mandates that the tax charged on a supply must be actually paid to the government by the supplier for the recipient to claim ITC. This provision, while aimed at ensuring tax compliance and preventing revenue leakage, has inadvertently (if it can be said so) placed an onerous burden on recipients, who may have no control over the supplier’s tax behavior.

The Basic Dispute

The Basic Dispute emerges from a systemic vulnerability. The central issue in Maruti Enterprise vs. Union of India which has been mentioned supra, revolves around the principle of vicarious liability, a legal doctrine where one party is held responsible for the unlawful actions of another on the basis of their relationships. In numerous instances, businesses that have fulfilled their contractual obligations by paying the full invoice amount, including GST, to their suppliers, have found themselves penalized due to the non-compliance of those suppliers. More, specifically, if a supplier fails to file their GSTR-3B returns or does not remit the collected tax to the Government, the recipient’s ITC claim is denied. This situation is further complicated by the reliance on GSTR-2B, a static statement that reflects only those credits for which the supplier has filed returns. The dispute raises a fundamental question:

Should a bona fide purchaser, who has acted in good faith and fulfilled all obligations, be held accountable for the failures of a third party over whom they have no control of?

Constitutional Validity Questions:-

The petitioners in the case challenged the constitutional validity of Section 16(2)(c) of the CGST Act 2017, on two primary grounds.

First, they argued that the provision imposes an unreasonable restriction on the right to carry on any occupation, trade, or business, as guaranteed under Article 19(1)(g) of the Constitution. By making the recipient’s entitlement to ITC contingent upon the supplier’s compliance, the provision introduces an element of uncertainty and risk that can severely disrupt business operations.

Second, the petitioners contended that the provision violates Article 14, of the constitution which guarantees equality before the law.

They argued that it treats compliant and non-compliant taxpayers in the same manner, thereby failing the test of reasonable classification and intelligible differentia. The demand for a “second payment” of tax by the buyer, despite having already paid the supplier, was characterized as arbitrary and violative of the principles of natural justice.

The petitioners’ defense was grounded in the legal maxim ‘Lex non cogit ad impossibilia’ the law does not compel a person to do the impossible. They argued that it is practically and legally untenable to expect a buyer to ensure that the supplier has deposited the tax with the government. Buyers do not possess the statutory authority or the means to audit the internal tax compliance of their suppliers. Moreover, once a supplier is registered under the GST regime, it is presumed that the government has vetted and approved their credentials. By denying ITC to the buyer due to the supplier’s default, the state effectively transfers its administrative burden of tax collection onto private individuals. This, the petitioners contended, constitutes an impermissible delegation of sovereign responsibility and undermines the trust-based architecture of GST.

So, the core constitutional question was whether Section 16(2)(c) is arbitrary, ultra vires, and violative of Articles 14, 19(1)(g), 265, and 300A of the Constitution, or alternatively, whether it should be read down to protect bona fide purchasers from the consequences of supplier default.

Revenue’s Arguments:-

The Revenue’s position was rooted in the principle that ITC is not an inherent right but a statutory concession. Citing Section 155 of the CGST Act,2017,

Section 155:- Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.

it emphasized that the burden of proving eligibility for ITC lies squarely on the claimant. The Revenue argued that allowing ITC without ensuring that the tax has been actually paid to the government would result in a “fictional enrichment” of the taxpayer and a corresponding loss to the public exchequer. They also highlighted the unique structure of the GST regime, where tax settlement between the Centre and the States is contingent upon the actual realization of tax. In this context, permitting ITC on the basis of paper transactions, without actual tax payment, could disrupt the delicate fiscal balance and lead to significant revenue shortfalls for consuming states.

Judicial Divide

The Gujarat High Court’s decision must be viewed in the context of a broader judicial discourse on the issue. The Delhi High Court, in case of Quest Merchandising India Pvt. Ltd. vs Government Of Nct Of Delhi & Ors. on 26 October, 2017, W.P.(C) 6093/2017 & CM No.25293/2017 and the Tripura High Court, M/s. Sahil Enterprises Versus Union Of India [WP (C) No. 688 Of 2022], Dated January 6, 2026, had previously ruled in favor of taxpayers.

The landmark ruling given by the honorable High Court of Tripura on this litigation cannot be brushed aside, just like that, for its merit. In a significant ruling delivered on January 6, 2026, the Tripura High Court in M/s Sahil Enterprises v. Union of India (WP(C) No.688 of 2022) addressed the contentious issue of denying Input Tax Credit (ITC) to bona fide purchasing dealers when their suppliers fail to deposit GST collected from them with the government. To recap, on similar grounds, the dispute centered on whether Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, which conditions ITC availment on actual payment of tax by the supplier to the government, violates Articles 14, 19(1)(g), 265, and 300-A of the Constitution.

The petitioner, M/s. Sahil Enterprises, a rubber products trader, had purchased goods from M/s Sentu Dey between July 2017 and January 2019. Upon investigation, authorities discovered that while the supplier had filed Form GSTR-1 showing outward supplies, they filed ‘Nil’ GSTR-3B returns, failing to deposit the collected tax with the government. Consequently, the Assistant Commissioner invoked Section 73 of the Act, blocked the petitioner’s ITC balance, and issued a demand-cum-show cause notice on January 7, 2021, ultimately confirming the demand through an order dated May 17, 2022.

The petitioner contended that as a bona fide purchaser who paid GST and possessed valid tax invoices, denying ITC amounted to double taxation and punished them for the supplier’s misconduct a transaction beyond their control given the absence of any mechanism to verify whether suppliers deposit collected taxes. The department defended the provision under Section 16(2)(c), arguing that ITC is a statutory benefit subject to conditions, including actual tax payment to the government, and that courts should exercise judicial restraint in invalidating taxation statutes. They emphasized that the legislative intent was clear: only tax actually received by the government qualifies for ITC credit, maintaining the integrity of the GST chain mechanism. They contended that purchasers have the alternative remedy of suing errant suppliers for recovery.

The Division Bench comprising Chief Justice adopted a nuanced approach by reading down Section 16(2)(c) rather than striking it down entirely. The court recognized that while the provision serves legitimate revenue purposes, its blanket application creates manifest injustice by placing an “onerous and impossible burden” on bona fide purchasing dealers who have no mechanism to verify supplier compliance.  Applying the principle from B.R. Enterprises v. State of U.P., the court held that reading down provisions to save them from unconstitutionality is an accepted interpretative method. The court extensively relied on the Delhi High Court’s reasoning in Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi and its subsequent approval by the Supreme Court in M/s Arise India Ltd. and Commissioner of Trade and Tax, Delhi v. M/s Shanti Kiran India (P) Ltd., where similar provisions under the Delhi VAT Act were read down to exclude bona fide purchasers.  The Tripura High Court aligned with the Guwahati High Court’s decisions in National Plasto Moulding v. State of Assam and McLeod Russel India Ltd. v. Union of India, which followed the same interpretative approach. The judgment notably distinguished itself from contrary decisions by the Kerala, Patna, Madhya Pradesh, Madras, and Andhra Pradesh High Courts, which upheld Section 16(2)(c) without reading it down.

The Tripura High Court observed that those decisions failed to appreciate the practical impossibility faced by purchasers and overlooked the binding precedents established by the Supreme Court’s approval. The court’s final decision struck a careful balance: it upheld the constitutional validity of Section 16(2)(c), rejecting facial unconstitutionality challenges, but read it down to exclude its application to bona fide purchasing dealers who transact with validly registered suppliers issuing proper tax invoices where no collusion, fraud, or revenue evasion is established. The court specifically noted that the department had invoked Section 73 (applicable to non-fraudulent cases) rather than Section 74 (for fraud cases) against the petitioner, confirming the transaction’s bona fide nature. Accordingly, the court set aside the Assistant Commissioner’s order dated May 17, 2022, and directed immediate restoration of ITC to the petitioner. This landmark judgment establishes critical principles:

• bona fide purchasers cannot be penalized for suppliers’ defaults when they have fulfilled all documentary
• on procedural requirements, ITC denial must be restricted to cases involving fraud, collusion, or willful misrepresentation;
• while tax administration must pursue defaulting suppliers rather than punishing compliant purchasers.

The decision provided nationwide persuasive authority for similarly situated taxpayers challenging ITC denials under Section 16(2)(c), particularly where transactions are genuine and suppliers’ non-compliance occurs without purchaser knowledge or complicity. The court’s decision revolved around that the GST regime’s foundational principle of avoiding cascading taxation cannot be defeated by imposing impossible compliance burdens on genuine dealers. These courts held that in the absence of collusion or connivance between the buyer and the defaulting supplier, ITC should not be denied. They emphasized the need to protect bona fide taxpayers from being penalized for the actions of others.

However, the Revenue relied on Supreme Court judgments in Ecom Gill Coffee Trading vs Government of Karnataka, CIVIL APPEAL NO. 230 OF 2023, and Ald Automotive Private Limited vs The Additional Commissioner Of State Tax, on 9 March, 2022, Case Ref No:S.T.A.No.10/2021, which underscored the necessity of actual tax payment for ITC eligibility. These decisions highlighted the integrated nature of the GST system and the importance of ensuring that tax liabilities are discharged before credits are availed. The divergence in judicial opinions underscored the need for a definitive ruling to bring clarity and consistency to the law.

Final Decision

In its final judgment, the Gujarat High Court upheld the constitutional validity of Section 16(2)(c) of CGST Act 2017. The Court held that the provision is clear, unambiguous, and consistent with the legislative intent of ensuring tax compliance. While acknowledging the potential starkness of the law, the Court emphasized that such austerity does not, in itself, render a tax statute unconstitutional. The Bench observed that the primary objective of the provision is to safeguard government revenue and prevent tax evasion. The Court declined to read down or strike down the provision, holding it clear, unambiguous, and constitutionally valid when read with companion provisions. However, it strongly urged the Government to implement real-time technology-driven verification and pursue defaulting suppliers promptly. The Court also noted the introduction of Rule 37A,

Rule 37A. Reversal of input tax credit in the case of non-payment of tax by the supplier and re-availment thereof.-

Where  input  tax  credit  has  been  availed  by  a  registered  person  in  the  return  in FORM GSTR-3B for a tax period in respect of such invoice or debit note, the details of which have been  furnished  by  the  supplier  in  the  statement  of  outward  supplies  in FORM GSTR-11[,as amended in FORM GSTR-1A if any,] or  using  the invoice furnishing facility, but the return in FORM GSTR-3B for the tax period corresponding to the said statement of outward supplies has not been furnished by such  supplier  till  the  30th day  of September following the end of financial year in which the input tax credit in respect of such invoice or debit note has been availed, the said amount of input tax credit shall be reversed by the said registered person, while furnishing  a return in FORM GSTR-3B on or before the 30th day of November following the end of such financial year:

Provided that where the said amount of input tax credit is not reversed by the registered person in a return in FORM GSTR-3B on or before the 30th day of November following the end of such financial year during which such input tax credit has been availed, such amount shall be payable by the said person along with interest thereon under section 50.

Provided further that where the said supplier subsequently furnishes the return in FORM GSTR-3B for the said tax period, the said registered person may re-avail the amount of such credit in the return in FORM GSTR-3B for a tax period thereafter.

which provides a remedial mechanism for taxpayers to reclaim ITC once the supplier fulfills their tax obligations. This, the Court held, satisfies the requirement of proportionality and mitigates the potential adverse impact on bona fide taxpayers.  The following table gives a comparative understanding of the conflicting decision between the ruling of Honorable Hich Court of Tripura and Honorable High Court of Gujarat.

Table-A

The Judgement of Gujarat High Court in upholding the validity of Section 16(2) (c), while protects revenue integrity, it equally acknowledges the genuine hardship faced by honest purchasers, calling urgently for legislative reform but within the GST framework with technology applications.

Now, the implications of the judgment are far-reaching. For the Government, the ruling provides a robust legal foundation to enforce tax compliance and protect the public exchequer. It also strengthens the GST framework by reinforcing the principle that ITC is conditional upon actual tax payment. Additionally, from a tax administration standpoint, the judgment necessitates a recalibration of enforcement strategies. GST officers must be trained to distinguish between genuine and fraudulent transactions and to apply the law in a manner that upholds both revenue interests and taxpayer rights. The ruling also underscores the importance of inter-departmental coordination, particularly in tracking non-compliant suppliers and ensuring timely communication with affected recipients. The emphasize the legal rationale behind Section 16(2)(c), the evidentiary standards under Section 155, and the procedural safeguards available under Rule 37A. Officers must also be equipped to handle disputes with sensitivity and fairness, recognizing the potential hardships faced by compliant taxpayers.

The judgment signals a paradigm shift in procurement strategies across industries. For Taxpayers, particularly Small and Medium Enterprises (SMEs), the decision introduces significant compliance risks. SMEs often operate with limited resources and may lack the capacity to conduct thorough due diligence on their suppliers to validate their ITC eligibility. The fear of ITC reversals due to supplier defaults could lead to a preference for dealing with large, well-established vendors, thereby marginalizing smaller players. This could result in market consolidation and reduced competition. Additionally, stakeholders may need to invest in compliance monitoring tools and revise their procurement strategies to mitigate risk, leading to increased operational costs. Taxpayers can no longer afford to treat GST compliance as a back-office function. Instead, it must become an integral part of procurement planning and vendor management. Companies should mandatorily adopt a range of risk mitigation measures, including:

• Incorporating indemnity clauses in supplier contracts to recover taxes, interest, and penalties in case of default.
• Implementing payment hold-backs, where the tax component of an invoice is released only after confirmation of tax payment by the supplier.
• Utilizing government APIs and third-party tools to monitor supplier compliance in real-time, including return filing frequency and GST compliance ratings.

These measures, while potentially increasing administrative overhead, are essential for safeguarding ITC claims and ensuring business continuity.

Before bidding adieu…..

While the Tripura High Court offers equitable relief by reading down the law to protect the innocent, the Gujarat High Court reaffirms the sovereign mandate of fiscal discipline. The Tripura ruling serves as a reminder that the foundational principle of avoiding cascading taxation cannot be defeated by impossible burdens. Conversely, the Gujarat ruling establishes that ITC is a benefit that must be earned through strict vigilance. The Gujarat High Court’s verdict in Maruti Enterprise vs. Union of India represents a critical juncture in the evolution of GST jurisprudence. By affirming the validity of Section 16(2)(c) of CGST Act 2017, the Court has reinforced the principle that statutory compliance is a prerequisite for availing tax benefits. While the decision aligns with the Government’s objective of curbing tax evasion and ensuring fiscal discipline, it also places a significant onus on businesses to monitor their supply chains rigorously. The destination-based GST architecture, unlike VAT, carries cross-state fiscal implications making strict compliance essential. The ruling serves as a clarion call for a more proactive and strategic approach to tax compliance, encompassing legal, operational, and technological dimensions. As the GST regime continues to evolve, it is imperative that both taxpayers and tax administrators adapt to this new compliance landscape with diligence, fairness, and foresight.

Jai Hind !!!!!!