NGTP Tag, Active Supplier, Wrong Quantification and Dual Action: Why Bona Fide GST Buyers Are Being Harassed Instead of Real Defaulters
One of the most troubling developments in present-day GST administration is the growing use of the NGTP tag as though it were conclusive evidence against every recipient who has dealt with the tagged supplier. On paper, NGTP identification may be intended as a risk-flagging tool. In practice, however, it is increasingly becoming a ready-made trigger for blocking ITC under Rule 86A, issuing DRC-01A intimations under Section 74, threatening retrospective cancellation consequences, and forcing bona fide taxpayers into repeated defensive litigation. This trend is not merely harsh; it is becoming administratively dangerous because the foundation itself is often shaky, incomplete, or mechanically reproduced without tangible material.
The present issue is not that the department should never identify non-genuine taxpayers. Tax administration is entitled to investigate fake firms, circular trading, bill trading, and fraudulent availment of ITC. No professional or taxpayer can seriously object to action against a real defaulter. The problem begins when a departmental label becomes a substitute for evidence, and when the same label is then used by multiple officers to launch overlapping actions against one genuine recipient, even though the supplier’s registration remains active on the GST portal, returns continue to be filed, transactions are reflected in GSTR-2B, and tax is shown as paid in GSTR-3B.
What is happening on the ground in Karnataka today deserves serious attention from taxpayers, professionals, and even fair-minded officers. Notices are being issued on the strength of upstream information said to have come from the Additional Commissioner, then to the Joint Commissioner, then to the LGSTO or Audit authority, and finally to the taxable person. By the time the notice reaches the taxpayer, the number shown as alleged ineligible ITC is sometimes plainly wrong on the face of the notice itself. In one client matter, the notice proposing Rule 86A action mentioned taxable turnover of ₹11,86,080 but showed tax quantification as ₹21,66,054 instead of ₹2,13,494 at 18 percent. A taxpayer receiving such a notice is shocked, confused, and forced to defend a demand that the issuing authority itself appears not to have verified. When even the basic arithmetic in the notice is wrong, the natural question is: who is responsible for this?
This is not a minor clerical issue. Wrong quantification in a Rule 86A or Section 74 notice can paralyse business, damage credit standing, disturb cash flow, and create fear of coercive recovery. If such figures are being generated or propagated through AI-assisted, template-based, or data-pushed internal processes without officer-level verification, then the danger is not only legal but systemic. A machine-generated suspicion cannot replace a statutory satisfaction based on tangible material. Rule 86A itself requires “reasons to believe” and reasons to be recorded in writing; it does not permit blind adoption of forwarded allegations or unverified computational errors.
The factual pattern now seen repeatedly
The pattern is becoming common. A supplier is said to be “non-existing” in an NGTP report. Yet the same supplier’s GSTIN remains active on the GST portal. The supplier continues in the line of business, invoices are issued, the buyer receives goods or services, purchases are reflected in GSTR-2B, and the supplier files GSTR-1 and GSTR-3B for the transaction period or subsequent period. Despite all this, the buyer receives a notice from one Assistant Commissioner proposing restriction of ITC under Rule 86A on the footing that the supplier is non-existing. The buyer files a detailed reply with purchase invoices, ledger extracts, bank statements, transport documents, stock records, GSTR-2B reflection, and supplier return details, and obtains acknowledgement from the department.
Then, after a short gap, another officer in the same State jurisdiction issues a DRC-01A under Section 74(5) on the very same supplier, same transaction set, same financial years, and same ITC, again relying on the same NGTP tag or report. The taxpayer is left wondering whether the department has read the earlier reply at all, whether the two officers are acting independently without coordination, and whether the GST system has any internal discipline to prevent duplication. What was first described as a preventive concern under Rule 86A suddenly reappears as a fraud-based adjudication issue under Section 74. The same taxpayer, same supplier, same years, same alleged credit, and same fact matrix are made the subject of two official actions.
This is precisely where the charge of harassment gains force. Taxpayers are not objecting to lawful proceedings supported by concrete facts. They are objecting to a situation where one allegation, unsupported by disclosed material, spawns’ multiple notices from different officers in the same jurisdiction, while the real supplier remains active and apparently untouched. Real defaulters often escape into the system’s blind spots; bona fide buyers remain fully on the grid and become easy targets because they are traceable, compliant, and document-rich. That inversion is what is eroding confidence in GST administration.
Rule 86A is not a free-hand power
Rule 86A is a serious provision. It permits the Commissioner or an officer authorised by him, not below the rank of Assistant Commissioner, to restrict utilisation of the amount available in the electronic credit ledger where he has reasons to believe that the ITC available has been fraudulently availed or is ineligible in specified situations. Those situations include invoices issued by a registered person found non-existent or not conducting business from the registered place, invoices without actual receipt of goods or services, tax charged not paid to Government, the person availing credit being non-existent, or absence of valid documents. Importantly, the Rule requires reasons to be recorded in writing and does not authorise mechanical blocking based on vague suspicion.
The Rule also has a built-in limitation: the restriction ceases after one year from the date of imposition unless lifted earlier. This itself shows that Rule 86A is preventive and temporary, not a substitute for proper adjudication. It cannot become an everyday weapon for automatic credit blocking merely because a backend report contains an NGTP flag. Before invoking Rule 86A, the authority must have some live, tangible, and defensible material connecting the blocked credit to fraud or ineligibility in the hands of the person against whom the rule is used.
The Karnataka High Court has recently underlined this limitation. In M/s Sri Padmavathi Marketing v. The Assistant Commissioner of Commercial Taxes, LGSTO, Bengaluru (dated 04.03.2026), the Court held that Rule 86A can be invoked only where the taxpayer whose ledger is blocked has itself fraudulently availed or is holding ineligible ITC. In that case, the allegation was that the petitioner, as supplier, had issued invoices that enabled the recipient to avail fraudulent ITC. The Court held that even if the recipient had wrongly availed ITC, Rule 86A could be invoked only against the person who availed that credit, and not against another taxable person merely because its invoices were part of the story. The show cause notice was held improper and without jurisdiction, and the department was directed to unblock the electronic credit ledger.
The importance of this judgment is deeper than the facts of that case. It reminds officers that Rule 86A is person-specific, fact-specific, and jurisdiction-sensitive. It cannot be used casually because another taxable person somewhere in the chain has been tagged. The rule demands legal discipline. If this is true in a case against a supplier, it is equally relevant where a buyer is targeted only because a supplier has been tagged without disclosure of the material behind the tag.
Active supplier and continuing business: why the contradiction matters
A practical contradiction is now repeatedly seen in these cases. The department alleges that the supplier is “non-existing” or “non-genuine,” yet the GST registration remains active on the portal. Returns are filed. Business continues. Sometimes cancellation, if any, comes later, and even then, it is made retrospective after the transactions. In some cases, even cancellation itself appears to be based more on backend conclusions than on disclosed field verification material.
This contradiction is not a small factual inconsistency. If the supplier is truly non-existent, why is the registration still active? Why were outward supplies accepted in GSTR-1? Why was GSTR-3B payment accepted? Why were e-way bill or return systems not frozen contemporaneously? If the department’s own systems continue to recognise the supplier as active and the recipient’s GSTR-2B continues to reflect the invoice, then a later notice against the buyer must disclose what new tangible material shows that the supplier was actually non-existent at the relevant time. Mere reproduction of the phrase “NGTP report says non-existing” is not enough.
The Karnataka High Court has also been reported to have reaffirmed that a bona fide purchaser cannot be denied ITC merely because the selling dealer failed to deposit tax or was later found problematic, and that in the absence of fraud, collusion, or non-genuine transactions, the department should proceed against the defaulting seller rather than penalising the purchaser. That line of reasoning is directly relevant where the buyer has invoices, receipt of goods, GSTR-2B reflection, and there is nothing to show collusion.
Dual action: Rule 86A plus Section 74 on the same transactions
The larger problem is not only the NGTP allegation. It is the dual action that follows from it. One officer proposes Rule 86A restriction. Another officer issues DRC-01A under Section 74(5) on the same transactions. The same taxable person must answer both, often with the same documents, same defence, and same factual explanation. This burdens the taxpayer twice over. It also raises an obvious question: if the department itself is unsure whether the issue is only preventive or whether it amounts to fraud-based adjudication, why should the taxpayer suffer parallel pressure from different ends?
Section 74 is not a casual provision. It is meant for cases of tax not paid, short paid, or ITC wrongly availed or utilised by reason of fraud, wilful misstatement, or suppression of facts. That standard is serious. It requires clear allegations and proper adjudication. A DRC-01A is only an intimation facility before a formal show cause notice, but when such intimation is used on the same issue already under Rule 86A scrutiny, and without dealing with the taxpayer’s earlier detailed reply, the process begins to look more coercive than corrective.
The principle against parallel proceedings has now received significant judicial attention. The Supreme Court has clarified that Section 6(2)(b) of the CGST Act bars initiation of parallel proceedings by one tax administration if the other has already commenced proceedings on the same subject matter, and has laid down a “same subject matter” test based on identical facts, liability, contravention, and relief sought. The Court also indicated that if overlapping liability is involved, authorities must communicate and avoid duplication; if a show cause notice is issued in respect of a liability already covered by another, it is liable to be quashed.
Although many Section 6(2)(b) cases arise between Central and State authorities, the underlying principle is equally important in cases of duplication within the same State apparatus through different functional wings when the same taxpayer, same transactions, same period, and same alleged ITC are being pursued twice over. Recent Karnataka reporting has also described the High Court as reinforcing the statutory embargo on dual and parallel GST proceedings, treating the bar as jurisdictional where the same subject matter is already under proceedings.
In real life, taxpayers do not experience these as neat legal categories. They experience them as harassment. One office says the ITC may be blocked. Another says pay up under Section 74. A third may later rely on supplier cancellation or AI-generated risk scoring. Meanwhile, no one appears to have gone through the basic figures, the transporter details, the bank entries, or the supplier’s continued business presence. This is precisely why coordinated, reasoned, single-window action is essential.
Wrong quantification is not a small defect
The example of taxable turnover ₹11,86,080 and tax shown as ₹21,66,054 instead of ₹2,13,494 must be discussed openly because it captures a larger systemic problem. Such a notice is not merely “wrong in arithmetic”; it reveals absence of application of mind. A taxpayer who receives such a notice is not expected to assume that the department means something else. The taxpayer must respond to what is stated on the notice. If the figure is absurd, the notice itself becomes evidence that the material was not verified before being forwarded and issued.
This matters especially under Rule 86A, where the very trigger is a formation of belief based on relevant material. If the quantification itself is demonstrably erroneous, it weakens the claim that there was any proper satisfaction at all. It also strengthens the taxpayer’s case that the action is driven by backend alert propagation rather than by lawful examination of facts. In professional practice, this is now a recurring grievance: large figures are pushed into notices, taxpayers panic, and only when the assessee reworks the notice line by line does the mismatch become apparent. That is not how a fair tax system should function.
If AI tools or automated intelligence reports are being used internally, that is not objectionable by itself. Modern tax administration may legitimately use analytics. But AI cannot become the adjudicating mind. An AI-generated or system-generated red flag is only the beginning of inquiry, never the end of it. The officer signing the notice must still verify the numbers, examine the documents, record reasons, and ensure that the allegation matches the facts. If that human check disappears, then genuine taxpayers will be crushed by machine-amplified error while real fraudsters learn how to remain one step ahead.
Bona fide buyers and the department’s burden
In a large class of ITC denial cases, the law’s harshest edge falls not on the disappearing supplier but on the available recipient. Yet emerging case law is increasingly uncomfortable with this. Karnataka reporting in 2026 indicates a clear judicial trend that a bona fide purchaser who has complied with statutory conditions cannot be denied ITC merely because the seller defaults in depositing tax, absent collusion or non-genuine transaction. The department’s remedy, in such cases, is to proceed against the defaulting seller.
This does not mean every recipient is protected merely by producing an invoice. The recipient must still prove genuineness: valid invoice, actual receipt of goods or services, payment trail, accounting trail, business use, and return reflection. But once these elements are shown, the burden cannot endlessly remain on the buyer to prove what lies entirely within the supplier’s or department’s control. If the supplier is said to be non-existent, the department must show the field material, inspection record, verification report, or other tangible evidence on which that conclusion rests. A label is not evidence. An undisclosed intelligence note is not a substitute for facts.
This is where many current NGTP-based notices are legally vulnerable. They often do not disclose when the supplier was found non-existent, who verified it, what address was visited, what evidence was gathered, whether statements were recorded, whether cancellation proceedings were initiated, whether returns were filed after the alleged finding, and how the buyer’s own documents were found unreliable. Without such linkage, the allegation remains broad, mechanical, and unfair.
Section 29(2) cancellations and retrospective fallout
The problem is made worse by retrospective cancellation under Section 29(2). In many practical cases, the supplier’s registration is cancelled only after the buyer’s transactions have already taken place, invoices have been issued, GSTR-1 and GSTR-3B have been filed, and the supplier has continued in business. Yet later, that retrospective cancellation is used as if it automatically proves that the earlier buyer was ineligible for ITC or was somehow connected with wrongdoing. This is a dangerous oversimplification.
Retrospective cancellation may have consequences, but it cannot be treated as conclusive proof against every bona fide buyer who transacted during the earlier active period. The department must still establish why the buyer’s transaction itself was not genuine. Otherwise, the law punishes the person who acted when the supplier was still visible, active, return-filing, and accepted by the GST system. In practical terms, this means the real administrative lapse is shifted onto the buyer. That is neither fair nor sustainable in the long run.
What taxpayers and professionals should do immediately
Where such notices are received, the first step is to build the factual record carefully and quickly. The taxpayer should place on record the supplier’s active portal status, copies of tax invoices, GSTR-2B reflection, proof of goods receipt or service receipt, ledger extract, bank payment details if made, stock movement or consumption record, and copies of the supplier’s GSTR-1/GSTR-3B details to the extent available. If the notice contains wrong quantification, that error must be highlighted clearly and arithmetically in the first reply itself.
The second step is to object specifically to the absence of tangible material. The reply should ask: on what date was the supplier found non-existent, by whom, based on what verification, and whether the underlying report can be disclosed or at least summarised for effective rebuttal. If Rule 86A is proposed, the taxpayer should insist that the authority record how the credit in the taxpayer’s own ledger is said to be fraudulently availed or ineligible. If a second officer issues DRC-01A or similar proceedings on the same issue, the taxpayer should immediately bring the earlier proceeding on record and request coordination, treating both matters as overlapping subject matter.
The third step is strategic. If the department persists with dual or duplicative action despite full disclosure of facts, the case becomes a candidate for writ remedy, especially where the notice is based on facially wrong quantification, lack of tangible material, or clear overlap of subject matter. Courts are more likely to intervene where the taxpayer demonstrates bona fides, documented compliance, and specific procedural unfairness rather than making only general allegations of hardship.
A concluding note in the author’s own voice
As professionals working every day with taxpayers, records, portal filings, and field-level notices, we are not against the department identifying NGTP cases. Genuine enforcement against fake firms and circular trading is necessary. But an NGTP report cannot become a magic wand. Before a bona fide buyer is accused, the department must place tangible material against the transaction and against the taxpayer’s conduct. If the supplier was active, filing returns, doing business, and the buyer’s documents are genuine, then the State must explain why the buyer is being targeted while the real defaulter escapes.
What is happening in practice today is deeply troubling. Backend tags, wrong quantifications, repeated notices, retrospective consequences, and parallel actions by different officers are putting genuine taxpayers under fear and financial pressure. The honest buyer is easy to find, easy to serve, and easy to threaten. The real fraudster is often gone by then. If this trend continues, GST administration will increasingly punish compliance and reward disappearance. That is not revenue protection. That is loss of trust.
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