The representation addressed to the Union Finance Minister, GST Council, and CBIC seeks legislative and administrative relief for bona fide GST recipients facing denial or reversal of Input Tax Credit (ITC) under Section 16(2)(c), Section 41, Rule 37, and Rule 37A of the CGST framework. It argues that genuine recipients who have received goods or services, paid GST to suppliers, maintained records, and complied with procedural requirements are being subjected to reversal of ITC, interest, notices, and litigation because of supplier-side defaults such as non-payment of tax or non-filing of returns. The representation also challenges the 180-day payment condition requiring reversal of ITC where supplier invoices remain unpaid beyond prescribed timelines, even in genuine commercial situations. It discusses judicial decisions from various High Courts and the Supreme Court, highlighting divergent approaches regarding protection available to bona fide purchasers. The representation seeks amendments clarifying that ITC should not be denied where transactions are genuine and recipients have acted without fraud or collusion. It also requests administrative safeguards, primary recovery from defaulting suppliers, removal of interest and penalties for genuine recipients, and rationalisation of the 180-day reversal provisions. Additionally, it advises taxpayers to maintain comprehensive transaction records and due diligence documentation in view of increasing scrutiny in ITC disputes.
To,
The Hon’ble Union Finance Minister
Government of India
North Block, New Delhi
Copy to:
The Chairperson, GST Council
The Revenue Secretary, Ministry of Finance
The Chairman, Central Board of Indirect Taxes and Customs
Subject: Representation seeking legislative and administrative relief for bona fide GST recipients facing denial or reversal of input tax credit under Section 16(2)(c), Section 16(2) provisos, Section 41, Rule 37 and Rule 37A of the CGST Act and Rules
Respected Madam,
This representation is made in the larger interest of bona fide taxable persons, professionals, small and medium businesses, and trade across the country who are presently facing a serious and recurring hardship under the GST law. The issue is not confined to one trade or one State. It goes to the foundation of GST as a value-added tax and to the credibility of the promise of seamless input tax credit.
The grievance is simple, but its consequences are severe. A registered recipient purchases goods or services from a registered supplier. The recipient receives the goods or services, obtains a tax invoice, records the transaction in books, pays the value and GST through banking channels, and avails input tax credit in the ordinary course of business. Later, if the supplier fails to pay the tax to the Government or fails to file the relevant return, the Department proceeds to deny or reverse the recipient’s credit by invoking Section 16(2)(c), Section 41 and Rule 37A. In another category of cases, even where the supplier has paid tax to the Government, credit is required to be reversed merely because the recipient has not paid the supplier within 180 days from the invoice date under the second proviso to Section 16(2) and Rule 37.
This position has created avoidable litigation, blockage of working capital, fear among genuine businesses, and uncertainty among professionals advising taxpayers. It is respectfully submitted that the time has come for the Ministry of Finance, GST Council and CBIC to intervene and draw a clear line between a fraudulent claimant and a bona fide recipient.
The statutory difficulty
Section 16(2)(c) of the CGST Act provides that no registered person shall be entitled to input tax credit unless 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 (CBIC Section 16). The second proviso to Section 16(2) further provides that where the recipient fails to pay the supplier the value of supply along with tax within 180 days from the invoice date, an amount equal to the ITC availed by the recipient shall be paid by him along with interest, except in supplies on which tax is payable under reverse charge (CBIC Section 16).
Section 41 now permits availment of self-assessed credit but requires reversal with interest where the supplier has not paid the tax payable on such supply, with re-availment after the supplier pays the tax (CBIC Section 41). Rule 37A prescribes a mechanism where credit is reversed if the supplier has furnished invoice details in GSTR-1 or IFF but has not furnished GSTR-3B by 30 September following the financial year, with the recipient required to reverse by 30 November and permitted to re-avail after the supplier files the return (CBIC Rule 37A).
Rule 37 separately provides for proportionate reversal where the recipient does not pay the supplier within 180 days, with interest under Section 50 and re-availment after payment to the supplier (CBIC Rule 37). Thus, the law presently imposes two distinct burdens on the recipient: one for the supplier’s statutory default and another for the recipient’s commercial non-payment within 180 days.
The recipient has no statutory control over either the supplier’s GSTR-3B filing or the supplier’s actual discharge of tax. The recipient cannot inspect the supplier’s electronic cash ledger, compel the supplier to utilise credit properly, compel filing of returns, or enforce tax payment to the Government. Yet the recipient is asked to suffer reversal, interest, notices, adjudication and sometimes penalty for default committed by another registered person.
Why this requires immediate policy correction
The professional community fully supports strict action against fake invoices, circular trading, bill trading, non-existent suppliers, sham transport documents, and collusive arrangements. No honest professional can argue that fraudulent credit should be protected. But the law must not proceed on the footing that every recipient is guilty merely because the supplier has defaulted.
In ordinary trade, the recipient can do only what a prudent businessman is expected to do. He can verify GST registration, insist on a valid tax invoice, receive goods or services, maintain stock and inward records, ensure e-way bill compliance where applicable, pay through banking channels, reconcile GSTR-2B, preserve correspondence and follow up with the supplier. Beyond this point, the law expects him to do the impossible. It requires him to guarantee the supplier’s tax payment to the Government.
This is not a mere compliance inconvenience. It changes the character of GST credit. Input tax credit is intended to remove cascading. If a genuine recipient who has borne the tax burden is denied credit because of supplier default, the same transaction suffers tax twice: once when the recipient pays tax to the supplier and again when the recipient is denied credit or forced to reverse it.
The Department has wide statutory powers against the defaulting supplier. It can issue notices, assess liability, recover dues, attach bank accounts, cancel registration, initiate prosecution in appropriate cases and use GST portal data to identify non-filers and defaulters. The recipient has no such power. Therefore, the primary recovery should be from the supplier who collected tax or who was liable to pay tax, and not from the innocent recipient.
Judicial position and need for clarity
The courts have not spoken in one voice on this issue. This divergence itself calls for an immediate clarification or amendment so that taxpayers across India are not exposed to unequal treatment.
In Sahil Enterprises v. Union of India, the Tripura High Court upheld the constitutional validity of Section 16(2)(c) but read it down in favour of bona fide purchasers, holding that ITC should not be denied to a genuine purchasing dealer merely because the supplier failed to deposit tax, unless the transaction is not bona fide, collusive or fraudulent [Sahil Enterprises Vs. Union of India (Tripura HIgh Court)]. This approach strikes a practical balance between revenue protection and fairness to genuine taxpayers.
In Suncraft Energy Pvt. Ltd., the Calcutta High Court protected the recipient where the Department sought to deny ITC on account of GSTR-2A mismatch and supplier-side default, and the Supreme Court dismissed the Department’s special leave petition on 14 December 2023 (Assistant Commissioner Of State Tax Vs Suncraft Energy Private Limited & Ors. (Supreme Court of India)). The Calcutta High Court’s approach is important because it recognises that the purchasing dealer should not automatically bear the consequences of the selling dealer’s failure when the purchasing dealer has complied with the law.
In D.Y. Beathel Enterprises, the Madras High Court also emphasised that where the supplier has collected tax but failed to remit it, the Department must examine the supplier and cannot mechanically fasten the entire burden on the recipient (D.Y. Beathel Enterprises Vs State Tax Officer (Data Cell) (Madras High Court)). The principle underlying this decision is consistent with natural justice and elementary fairness in tax administration.
Under the earlier VAT law, the Delhi High Court in Arise India Ltd. read down a provision that denied credit to purchasing dealers for default by selling dealers, holding that such automatic denial to bona fide purchasers would be arbitrary ( Arise India Limited and others Vs. Commissioner of Trade & Taxes, Delhi and others (Delhi High Court)). Though it arose under the DVAT regime, the principle remains relevant because the mischief is the same: one registered dealer’s default is imposed upon another registered dealer who has acted bona fide.
At the same time, contrary decisions cannot be ignored. The Patna High Court in Aastha Enterprises took a strict view and treated the conditions of Section 16(2), including payment of tax to the Government, as mandatory for the recipient claiming credit (Aastha Enterprises through its Proprietor Sanjay Kumar Vs State of Bihar (Patna High Court)). The Gujarat High Court in Maruti Enterprise has also upheld the strict operation of Section 16(2)(c) and declined to read it down, thereby placing a significant compliance burden on recipients (Maruti Enterprise Through Its Authorized Partner Vs Union of India & Ors. (Gujarat High Court)).
The Supreme Court decision in State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd. is often cited by the Department, but its ratio should not be overextended. The Court held that the burden to prove genuine transaction and actual movement of goods lies on the claimant and that mere production of invoices and payment documents may not be sufficient in doubtful cases (State of Karnataka Vs Ecom Gill Coffee Trading Private Limited (Supreme Court)). This decision supports scrutiny of doubtful transactions. It does not support denial of credit where genuineness, receipt, documentation, payment and absence of collusion are established.
The law is therefore at a sensitive stage. If the strict view is mechanically applied, genuine businesses will be punished for defaults beyond their control. If the bona fide recipient principle is recognised, fraud can still be checked while honest taxpayers are protected. This is precisely where a statesmanlike legislative or administrative intervention is required.
The 180-day condition is a separate hardship
The second proviso to Section 16(2) and Rule 37 create another difficulty which requires reconsideration. In many cases, the supplier may have already paid the GST to the Government. There is no revenue loss. Yet the recipient is required to reverse ITC with interest only because the supplier’s invoice has not been paid within 180 days.
This rule does not distinguish between a deliberate non-payment and a genuine commercial situation. In practice, payments may be delayed because of retention money, performance guarantee clauses, milestone contracts, quality disputes, price variation claims, delayed certification by engineers, government department payment delays, insolvency proceedings, arbitration, litigation, set-off arrangements, running accounts, or longer credit periods agreed between parties.
In such cases, the GST law should not become a debt recovery mechanism between supplier and recipient. Commercial payment terms are governed by contract, trade practice and other laws. If the supplier has paid tax to the Government, there is no justification for reversing the recipient’s ITC with interest merely because the invoice remains unpaid beyond 180 days.
The 180-day condition may have been introduced to ensure that credit is not enjoyed where the recipient never pays the supplier. But its present form is too wide. It catches genuine commercial transactions and creates unnecessary reversals, re-availments, interest disputes and reconciliation burdens. The challenge pending before the Gujarat High Court on the 180-day proviso shows that taxpayers and professionals are now raising this issue seriously (Grant Thornton article on the 180-day ITC reversal rule, NJ Jain note on Gujarat High Court challenge).
Specific requests
In view of the above, the following reliefs are respectfully requested:
Amend or clarify Section 16(2)(c) so that ITC is not denied to a bona fide recipient merely because the supplier has failed to pay tax to the Government, where the recipient proves valid invoice, receipt of goods or services, payment through banking channels or recognised book adjustment, and absence of fraud or collusion.
Issue a CBIC circular to field formations directing that proceedings against recipients should not be initiated mechanically on the basis of supplier non-filing, supplier cancellation, GSTR-2A or GSTR-2B mismatch, or non-payment by supplier without first examining the recipient’s bona fides.
Mandate primary action against the defaulting supplier before recovery is made from the recipient, except in cases involving fake invoices, non-receipt of goods or services, circular trading, collusion, related-party accommodation entries, or other fraud involving the recipient.
Provide a statutory bona fide recipient defence under Section 16 or Section 41. The defence may require the recipient to produce invoice, proof of receipt, transport or service evidence, books of account, bank payment proof, GSTR-2B record, supplier GSTIN status and due diligence evidence.
Remove interest and penalty exposure for bona fide recipients in supplier default cases where the recipient has availed credit on the strength of statutory documents and portal-based records available to him.
Introduce a GST portal facility enabling recipients to verify supplier compliance in a meaningful manner. If the law expects a recipient to ensure tax payment, the portal must provide reliable invoice-wise or return-period-wise confirmation of such payment.
Amend the 180-day proviso and Rule 37 to exclude genuine commercial cases such as retention money, milestone billing, quality disputes, price disputes, government contracts, insolvency, arbitration, litigation, agreed long credit periods, running accounts and book adjustments.
Provide that no reversal or interest is required under the 180-day rule where the supplier has already paid the tax to the Government. In such cases, there is no revenue loss and no justification for interest.
Provide automatic re-credit and interest protection where credit is reversed from the recipient and tax is later recovered from the supplier, so that there is no double recovery by the Government.
Constitute a professional consultation mechanism with representatives from trade, industry, tax professionals and GST administration to frame a fair and workable standard operating procedure for supplier default cases.
Suggested statutory clarification
For consideration, an explanation may be inserted below Section 16(2)(c) in substance as follows:
“Provided that input tax credit shall not be denied to a registered recipient merely on the ground that the supplier has failed to pay tax to the Government, where the recipient establishes possession of a valid tax invoice, receipt of goods or services, payment of consideration including tax through banking channel or such other prescribed mode, and absence of fraud, collusion or wilful misstatement. In such cases, recovery shall ordinarily be made from the defaulting supplier, unless the proper officer records reasons in writing that the recipient was party to the fraud or that the transaction was not genuine.”
Similarly, the second proviso to Section 16(2) may be amended to exclude genuine commercial credit arrangements and to provide that reversal shall not apply where tax has already been paid by the supplier to the Government.
A professional caution to taxpayers
Until the law is amended or clarified, taxpayers should not treat this issue casually. A recipient claiming ITC must maintain a complete evidence file. This should include purchase order, contract, tax invoice, e-way bill where applicable, delivery challan, goods receipt note, lorry receipt, inward register, stock register, service completion evidence, bank payment proof, supplier ledger, GSTR-2B extract, supplier GSTIN status, correspondence with supplier and proof of due diligence.
For 180-day cases, taxpayers should preserve written credit terms, retention clauses, quality dispute records, debit notes, commercial correspondence, arbitration or litigation papers, insolvency communications, running account confirmations and board or management approvals wherever relevant. These documents may become critical in proving that the case is commercial and bona fide, not a tax avoidance device.
Conclusion
GST cannot be administered on the assumption that every recipient is responsible for every supplier’s default. Such an approach may be convenient for recovery, but it is not consistent with fairness, trade reality or the original design of a value-added tax system.
The requested relief will not protect fraud. It will protect honest trade. Fraudulent invoices, non-existent suppliers, circular transactions and collusive arrangements must be dealt with firmly. But a genuine recipient who has received goods or services, paid tax to the supplier, maintained records and acted with due care should not be made to finance the default of another registered person.
It is therefore respectfully requested that the Hon’ble Finance Minister, GST Council and CBIC may kindly consider suitable legislative amendment, clarification and administrative instructions at the earliest, so that GST credit remains a mechanism of tax neutrality and does not become a source of avoidable hardship to honest taxpayers.
Respectfully submitted,
S. Prasad
GST Practitioner
Ex-President of
Mysore District Tax Practitioners
Mysuru, Karnataka
Date:10.05.2026
Place: Mysuru
Disclaimer: This representation may also be read as a professional note for taxpayers and practitioners. The present legal position is unsettled. Taxpayers should not ignore notices on Section 16(2)(c), Rule 37A or 180-day reversal. They should reply with evidence, insist on verification of the supplier, distinguish genuine transactions from fake invoice cases, and specifically plead absence of fraud or collusion. Professionals should also advise clients to strengthen vendor due diligence and preserve transaction-wise records because the evidentiary burden in ITC litigation is becoming increasingly strict.
Author Bio
