Why Does the GST Department Chase Bona Fide Buyers Under Section 16(2)(c) Instead of Defaulting Sellers Under Section 76?
Summary: Section 16(2)(c) of the CGST Act makes a recipient’s entitlement to Input Tax Credit conditional upon the tax charged by the supplier having actually been paid to the government. Consequently, even a bona fide buyer who possesses a genuine invoice, receives the goods or services, pays the entire consideration including GST and files returns correctly may be required to reverse ITC if the supplier defaults. Section 76, however, independently empowers the GST department to recover tax collected but not deposited from the person who collected it, together with applicable interest and penalty. Despite this direct remedy, enforcement action is frequently taken against compliant buyers because they are easier to trace, possess identifiable assets and remain active within the GST system, whereas defaulting suppliers may have closed operations, disappeared or operated through shell entities. Automated GSTR-2B and GSTR-3B mismatch identification also makes buyer-side proceedings administratively easier than investigation and recovery against sellers. The Supreme Court’s decision in Bhandari Scrap Traders upheld the constitutional validity of Section 16(2)(c), recognising ITC as a statutory benefit subject to legislative conditions, including supplier payment of tax. Nevertheless, questions of fairness and enforcement sequencing remain. A balanced approach would prioritise recovery under Section 76 from the defaulting supplier and reserve ITC denial for transactions involving collusion, fraud or failure to establish genuineness. Until legislation or binding precedent clarifies the sequencing of these provisions, buyers should maintain comprehensive evidence of supplier verification, invoices, receipt of supplies, e-way bills, transport records, banking payments and return reconciliation.
Anyone who has dealt with a GST department notice in the last few years has probably come across this pattern: a buyer who paid the full invoice value, including GST, to a registered supplier, files his returns properly, claims Input Tax Credit, and then months later gets a notice asking him to reverse that credit and pay the tax again — this time out of his own pocket. The reason given is almost always the same one line: the supplier did not deposit the tax with the government.
At first glance this seems backwards. The seller collected the money. The seller had a legal duty to pay it over to the exchequer. So common sense says the department should go after the seller. Yet in practice, it is the buyer’s door that gets knocked on far more often. This article looks at why that happens, what the law actually allows, and whether the current approach is fair.
What the Law Actually Says
Section 16(2)(c) of the CGST Act lays down one of the conditions a taxpayer must satisfy before he can claim ITC — that the tax charged on the supply has actually been paid to the government, either in cash or through utilisation of admissible credit. On paper this looks like a routine anti-fraud safeguard. In practice, it has become the single most litigated condition in the entire ITC framework, because it puts the buyer in the position of guaranteeing his supplier’s conduct — something he has no real way to control once the transaction is complete and the invoice is genuine.
Section 76, on the other hand, deals with a completely different situation: a person who has collected tax “as representing tax” but not paid it to the government. This provision gives the department a direct, standalone route to recover that amount from the person who collected it, along with interest and penalty, regardless of whether any assessment proceedings are pending. In other words, the law already gives the department a tool designed specifically for the defaulting seller. The question is why this tool is used so sparingly compared to the far more frequent invocation of Section 16(2)(c) against the buyer.
The Bhandari Scrap Traders Position
The debate around Section 16(2)(c) was pushed further by the ruling in the Bhandari Scrap Traders matter, where the constitutional validity of the provision was upheld. The reasoning offered was that claiming ITC is a statutory concession, not a vested or absolute right, and Parliament is free to attach conditions to it — including a condition that depends on the conduct of a third party, the supplier. Once that principle is accepted, a buyer who has done everything right — genuine invoice, actual payment, proper filing — can still end up losing his credit purely because someone else in the chain defaulted.
It is worth being upfront that case law citations of this kind should always be independently verified before being relied upon or quoted in any filing, since even carefully summarised references can miss nuance or be superseded by later rulings.
Why the Department Leans on Section 16(2)(c)
Three practical reasons seem to explain the pattern, even if none of them amount to a legal justification.
Compliant Buyers Are Easier to Trace
First, there is the simple matter of who is easier to find. A compliant buyer is, by definition, a functioning, traceable business with a bank account, a GST registration in good standing, and assets that can be attached. A defaulting seller, by contrast, has frequently vanished, shut down, or was never a genuine business to begin with — sometimes a shell entity set up purely to issue invoices and disappear before the tax season is over. Recovery under Section 76 against such a seller can mean months of tracing, summons that go unanswered, and ultimately a write-off. Recovery from the buyer is comparatively instant.
Automated Return-Mismatch Proceedings
Second, the entire process has become automated. Mismatches between GSTR-2B and GSTR-3B are flagged by the system itself, and a notice under Section 16(2)(c) can be generated with minimal manual effort. Proceeding against a seller under Section 76 usually requires actual field investigation — verifying whether tax was collected, tracking down the seller, and building a recovery case — work that cannot be automated in the same way.
Burden Shifted to the Buyer
Third, and perhaps most consequential, the burden of proof has effectively been shifted onto the buyer. Instead of the department having to establish that the seller collected tax and failed to deposit it, the buyer is expected to demonstrate that the tax genuinely reached government coffers — something he has limited visibility into and no legal power to verify at the time of the transaction.
The Fairness Question
This brings up the central issue that many practitioners and taxpayers keep raising: should an honest buyer, who has already paid GST once, be made to pay it again simply because he is administratively more convenient to collect from than the seller who actually pocketed the money?
There is a reasonable argument that recovery proceedings under Section 76 against the defaulting seller ought to be exhausted first, with credit reversal treated as a last resort rather than a first instinct — reserved for cases involving genuine collusion or knowledge of fraud, rather than applied uniformly to every buyer caught on the wrong side of a return mismatch. On the other side, the department’s position is that allowing buyers to claim credit without any verification would open the door to large-scale fake invoicing, and that some responsibility for supplier due diligence has to rest with the recipient, who is, after all, in a commercial relationship with the seller and can choose who to transact with.
Both positions have merit, and the tension between revenue protection and taxpayer fairness is unlikely to be resolved definitively by a single judgment. Until legislative clarity or a binding precedent settles the question of sequencing between Sections 76 and 16(2)(c), buyers would do well to maintain thorough documentation of payment, delivery, and supplier verification, since that record is likely to be their strongest defense if a notice does arrive.
