Retrospective GST Cancellation: Buyers Punished for Supplier Defaults by Officers

Retrospective Cancellation under Section 29(2): How GST Officers Are Punishing Genuine Buyers for Supplier Defaults

1. How section 29(2) has turned into a “weapon”

Section 29(2) of the CGST Act allows the department to cancel GST registration where the registered person is non‑existent, not conducting business from the declared place, not filing returns, issuing invoices without supply, or has obtained registration by fraud. On paper, this power is meant to clean the system – to remove shell entities and fly‑by‑night operators, not to disturb genuine business transactions years after they were completed.

On the ground we are now seeing a very different use. Officers cancel registration retrospectively, many times from the very date of registration, and then use that same retrospective cancellation as the main foundation to:

• deny ITC to multiple buyers,
• raise large demands with interest and penalty, and
• in some matters, even trigger prosecution under section 132 by calling everything “fake ITC” or “bogus transactions”.

In practice, section 29(2) has started operating as a blunt weapon against reachable, genuine recipients instead of a targeted anti‑fraud tool against the real defaulting supplier.

2. The typical pattern now seen in the field

Across India, a common pattern is now visible:

• A supplier later becomes non‑filing, non‑traceable or is reported as “non‑existent” at the registered place of business.
• Based mainly on a brief field report or intelligence note, the officer cancels the registration with retrospective effect under section 29(2), sometimes from the very start of registration.
• After that, the same cancellation order is picked up and used to attack ITC of all buyers who purchased from that supplier, without independently examining each buyer’s documents.

In many real cases, the factual position for the buyer is exactly the opposite:

• At the time of each purchase, the supplier’s GSTIN was active on the GST portal.
• Goods actually moved – supported by e‑way bills, lorry receipts, GRNs, weighment slips and stock entries.
• Consideration plus GST was paid through banking channels.

Still, only because of a later retrospective cancellation order, ITC is blocked or denied and the buyer is painted as a beneficiary of fake ITC. In more aggressive matters, this very cancellation is used as the “base” for section 132 prosecution, without any serious inquiry into whether the buyer’s own transactions were bogus.

3. What courts are now clearly saying

3.1 Retrospective cancellation by itself cannot wipe out ITC

High Courts have now started drawing a clear line: retrospective cancellation of the supplier’s GSTIN, by itself, is not enough to deny ITC to a bona fide buyer.

• The Calcutta High Court in M/s Gargo Traders v. Joint Commissioner, State Tax held that ITC cannot be denied merely because the supplier’s registration was cancelled retrospectively, when the purchaser has produced invoices, e‑way bills, transport documents and bank statements and there is no allegation of collusion.
• The Himachal Pradesh High Court in Himalaya Communication Pvt. Ltd. v. Union of India similarly held that ITC cannot be denied solely on the ground of retrospective cancellation of the supplier’s GSTIN without first examining genuineness of the transaction and the buyer’s evidence.
• Commentary on these cases rightly links them back to the Supreme Court’s judgment in State of Maharashtra v. Suresh Trading Co., under the old sales tax law, where a bona fide purchasing dealer was protected despite later cancellation of the selling dealer, because he had acted in good faith at the time of purchase.

The core principle is the same under GST – the focus must be on whether the transaction is genuine and whether the buyer has complied with section 16(2), not on a later administrative action against the supplier.

3.2 Retrospective cancellation under section 29(2) must be reasoned, not mechanical

Courts have also criticised the way retrospective cancellation orders themselves are being passed. In many matters:

• The show cause notice does not even propose retrospective effect.
• The final order suddenly cancels registration from a back date without any discussion or reasons.

Calcutta and other High Courts have set aside such orders as non‑speaking and arbitrary, insisting that there must be a clear proposal, proper opportunity and recorded reasons if cancellation is to be made retrospective. Recent analysis emphasises that retrospective effect is exceptional and must be supported by objective material – for example, that the entity never carried on any genuine business or that registration was obtained by fraud from inception.

The message from the judiciary is simple: section 29(2) is not a shortcut to bypass investigation and natural justice; it cannot automatically destroy ITC claims of buyers.

4. Why genuine buyers are suffering on the ground

For a genuine buyer, the practical position is harsh:

• At the time of each transaction, the supplier’s GSTIN is active on the portal.
• The buyer has no real‑time mechanism to monitor whether the supplier is paying tax or filing returns after the sale.
• The buyer does exactly what the law expects – checks GSTIN, receives goods, pays value plus tax through bank, keeps full records.

Even then, once the department cancels the supplier’s registration with retrospective effect and then denies the buyer’s ITC, three serious consequences follow:

1. Double taxation: The buyer ends up paying tax again by reversal of ITC with interest and penalty, while the department still reserves the right to demand the same tax from the supplier. This is nothing but double collection on the same supply.

2. Arbitrariness under Article 14: Two buyers in the same position – both having done full due diligence – can be treated differently only because, in one case, the supplier was later cancelled retrospectively and in another case he was not. This differential treatment has no rational basis.

3. Harassment under threat of section 132: Buyers are sometimes threatened with, or actually subjected to, prosecution under section 132 only because they purchased from a supplier later branded non‑existent, without proper evaluation of their own documents and conduct.

Recent articles and judgments openly recognise that this approach is punishing bona fide taxpayers for the department’s own failure to identify and control risky suppliers in time.

5. Key judicial principles buyers can rely on

From the above jurisprudence, some stable defence lines emerge for genuine recipients:

• Focus on genuineness of the transaction: Authorities must first examine the buyer’s invoices, e‑way bills, transport records, stock registers and bank statements. Denial of ITC only on retrospective cancellation, without such verification, violates natural justice.
• Section 29(2) cannot override section 16: Section 29(2) is an administrative power to cancel registration; it does not automatically take away a buyer’s substantive ITC right when section 16(2) conditions are satisfied and the buyer has acted in good faith.
• No collusion, no fraud – no ITC denial: Where there is no allegation or proof of collusion, bogus billing or knowledge of supplier fraud, ITC of the buyer should not be denied merely because the supplier is later cancelled retrospectively.
• Retrospective effect needs reasons and tangible material: Retrospective cancellations passed without clear proposal in SCN and without material showing that past supplies were sham have been struck down as arbitrary.
• Constitutional protection: Using section 29(2) retrospectively to deny ITC to a bona fide buyer, while still treating the same supplies as taxable in the supplier’s hands, amounts to the State approbating and reprobating and offends Articles 14 and 19(1)(g).

These principles are very useful building blocks for replies, appeals and writ petitions.

6. How section 155 (burden of proof) is being mis‑read against buyers

Section 155 states that when any person claims ITC, the burden of proof lies on that person. This is correct in principle – the buyer must first bring primary documents and explain the transaction.

In practice, departments are reading section 155 in a one‑sided manner:

• The buyer produces all documents – invoices, e‑way bills, GRNs, transport LRs, stock registers and bank statements.
• The authority does not properly verify these or record specific findings on each category of evidence.
• The order simply says “reply/documents are not satisfactory” and confirms the demand, as if section 155 permits a one‑line rejection.

Recent writing on retrospective cancellation correctly explains that section 155 only covers Step 1 – the taxpayer’s duty to claim ITC and produce evidence. After that comes Step 2 – the department’s duty to examine those documents, test genuineness, give a fair hearing and then record detailed reasons if ITC is to be refused. Section 155 does not authorise mechanical rejection after the buyer has discharged his initial burden.

Therefore, whenever you draft reply, appeal or writ, it is important to plead section 155 correctly – accept that the initial onus is on the buyer, show how it is discharged in detail, and then attack the department for failing to perform its own part of the burden.

7. Model paragraph for reply / appeal by bona fide buyer

You can use and adapt the following paragraph in reply to SCN, first appeal or even writ petition:

“The appellant respectfully submits that the entire demand is founded solely on retrospective cancellation of the supplier’s registration under section 29(2) of the CGST Act, without any finding that the underlying transactions are sham or that the appellant colluded in any alleged fraud. It is undisputed that, at the time of each supply, the supplier’s GSTIN was active on the common portal; goods were physically received and recorded in the stock registers; valid tax invoices and e‑way bills were issued; and payment of value plus tax was made through normal banking channels. The appellant has thus fully discharged the initial burden under section 155 by producing invoices, e‑way bills, transport records, stock registers and bank statements.

High Courts across the country, including the Calcutta High Court in M/s Gargo Traders and similar cases and the Himachal Pradesh High Court in Himalaya Communication Pvt. Ltd., have clearly held that input tax credit cannot be denied to a bona fide recipient merely because the supplier’s registration has been cancelled with retrospective effect, without first examining genuineness of the transactions and the recipient’s documents. The Hon’ble Supreme Court in Suresh Trading Co. has likewise affirmed that rights of a genuine purchaser cannot be extinguished merely on account of subsequent cancellation of the selling dealer’s registration. In the present case, the adjudicating authority has not discussed or disproved the appellant’s documents at all and has dismissed the reply as ‘not satisfactory’ by a bare assertion. Such mechanical denial of ITC results in double taxation, is arbitrary and violative of Articles 14 and 19(1)(g) of the Constitution, and therefore deserves to be set aside.”

8. Prosecution under section 132 based only on retrospective cancellation

A disturbing trend is to threaten or start prosecution under section 132 simply because the supplier has been retrospectively cancelled and the department labels all past purchases as “fake ITC”.

Here, you can take a clear stand:

• Section 132 is a penal provision, not an automatic consequence of every ITC dispute; it requires specific mens rea – intent to issue fake invoices, avail credit without supply, or actually evade tax.
• When the only material is retrospective cancellation under section 29(2) and some return‑level mismatch, with no evidence of non‑movement of goods, bogus transport, cash‑back of tax or collusive statements, launching prosecution is completely disproportionate.

A model paragraph can be:

“The very foundation for the proposed prosecution under section 132 is misconceived. The only circumstance relied upon by the department is that the supplier’s registration has been cancelled retrospectively under section 29(2), and on that basis, purchases made by the petitioner years earlier are now described as ‘fake’. There is no material to show that the petitioner issued or received invoices without actual movement of goods, or that any part of the tax charged by the supplier was routed back in cash or otherwise. In absence of cogent evidence of mens rea and collusion, the extraordinary step of criminal prosecution is wholly unwarranted. Courts interpreting similar fraud‑based penalty provisions have repeatedly cautioned that penal sections must be invoked only where there is clear, specific material and not as a pressure tactic in routine ITC disputes arising from retrospective cancellation. Treating every bona fide buyer of a later‑cancelled supplier as a criminal offends the doctrine of proportionality and violates Articles 14 and 21 of the Constitution.”

This can be added under a separate heading like “Grounds against initiation of prosecution under section 132”in your petition.

9. Practical compliance advice to genuine buyers

Finally, for genuine buyers, some practical safeguards are now essential:

• Always verify and retain proof that the supplier’s GSTIN was active on the portal at the time of transaction (screenshots / downloaded master data).
• Maintain full trail – invoices, e‑way bills, LRs, weighment slips, gate entries, GRNs, stock registers, bank payment proofs.
• Whenever ITC is proposed to be denied only because of retrospective cancellation, insist that your documents are examined and that there are clear findings on genuineness, not just on portal status.
• Challenge non‑speaking orders at the earliest stage – first appeal and, where needed, writ, on grounds of lack of reasons, wrong use of section 29(2), misreading of section 155, double taxation and arbitrariness under Article 14.

This is an area where honest taxpayers must be proactive. Once ITC is mechanically denied and prosecution is threatened on the basis of retrospective cancellation alone, the cost of rebuilding trust with banks, vendors and the department is very high.   -author