Punishing the Innocent, Sparing the Guilty: How GST Enforcement is Reversing the Burden on Bona Fide Buyers
In the GST ecosystem, the supplier defaults – fails to deposit collected tax, becomes non‑existent, or gets cancelled retrospectively. The recipient (bona fide buyer), who has paid tax through banking channels, holds valid invoices, e‑way bills, and satisfies all section 16 conditions, gets hammered with ITC reversal u/s 16(2) (aa)/(c), Rule 86A blocking, section 83 recovery, section 74 demand, section 29(2) cancellation, and even prosecution u/ss 69/70/132.
Why? Because the recipient is traceable, files return, and has assets. The defaulting supplier escapes, while 60–70% of innocent buyers face harassment, huge demands, and working capital crunch they cannot afford. The department ignores section 16(2) proof, rejects banking payments, and mechanically denies goods receipt based on “enforcement reports”. Courts have repeatedly cautioned, yet the practice continues.
This article dissects the malaise with judgments and provides a ready‑to‑use draft representation for your clients.
1. The Systemic Reversal of Burden: How Innocent Buyers Suffer
| Supplier Default | Weapon Used Against Bona Fide Recipient | Legal Provision Invoked | Consequence to Innocent Buyer |
| Collected tax but not deposited | ITC reversed despite buyer payment proof | Section 16(2)(c) | Double taxation; working capital loss |
| GSTR‑1 not uploaded / 2A/2B mismatch | ITC denied mechanically | Section 16(2)(aa) | Denial even with invoice, payment, goods receipt |
| Supplier becomes non‑existent | Prosecution / penalty | Sections 69/70/132 | Arrest threat, personal liability |
| Supplier default flagged | ITC ledger blocked | Rule 86A | Liquidity crisis, no debit allowed [ from prior] |
| Supplier default | Provisional attachment | Section 83 | Assets frozen without adjudication |
| Supplier default | Demand + penalty + interest | Section 74 | Huge liability + 18% interest |
| Supplier non‑existent per enforcement report | Retrospective registration cancellation | Section 29(2) | Cascading ITC denial for entire chain + business halt |
| No action on supplier | Section 76 (interest on undue credit) never invoked | Section 76 ignored | Department spares supplier, targets buyer |
The irony: Department chases the easy target (recipient), ignores section 76 against supplier, and rejects buyer’s documents as “self‑serving”. This is against justice, equity, and judicial precedent.
2. Supreme Court: Remedy Lies Against Defaulting Seller, Not Bona Fide Buyer
Commissioner, Trade & Taxes v. Shanti Kiran India (P) Ltd. (SC, 09.10.2025): Dismissed department’s SLP, upholding Delhi HC. Bona fide purchaser entitled to ITC despite seller’s failure to deposit tax. Key holdings:
Seller was registered at time of supply; invoice genuine; no collusion alleged.
Department cannot shift burden to buyer; recover from defaulting seller.
Applies to GST u/s 16(2)(c).
Arise India Ltd. (SC, 2022, affirmed in GST context): Reiterated Quest Merchandising (Del HC) – ITC not deniable u/s 9(2)(g) DVAT if buyer paid tax in good faith.
3. Gauhati HC Landmark: Section 16(2) (aa) Read Down to Protect Buyers
McLeod Russel India Ltd. v. Union of India (Gauhati HC, 09.12.2025, WP(C) 5725/2022): Section 16(2) (aa) read down – ITC cannot be denied mechanically for supplier’s GSTR‑1 non‑upload / 2B mismatch.
Buyer has no control over supplier compliance.
Department must give opportunity to prove bona fides: invoice, payment (banking), goods receipt.
Denial causes double taxation, violates GST’s anti‑cascading design.
Applies to section 16(2)(c) too.
Tripura HC (2026): ITC cannot be denied for supplier default; recovery from seller.
4. Why Department Does This Despite Rulings?
Traceability: Recipients file returns; suppliers vanish.
No accountability: Mechanical notices via AI/DRI reports; no verification.
Revenue pressure: Easier to raise demand on buyer than chase ghost suppliers.
Section 76 ignored: Interest only on supplier’s undue credit, not buyer.
Result: 60–70% bona fide businesses crippled, unable to pay crores in demands.
5. Ready‑to‑Use Draft: Representation to Proper Officer / Writ Grounds
Subject: Prayer to Drop/Stay Proceedings u/ss 16(2) (aa)/(c), 74, 29(2), Rule 86A, 83 Against [Your Client] – Bona Fide Buyer Protected by SC/Gauhati HC Rulings
Facts establishing bona fides u/s 16(2):
Supplier [GSTIN] registered at time of supply; tax paid via RTGS [attach statements].
Valid tax invoice, e‑way bill, GR/LR, stock register entries annexed.
All conditions u/s 16(2)(a)–(b) fulfilled; return filed timely.
Supplier default irrelevant to buyer’s ITC:
Shanti Kiran (SC, 09.10.2025): “Bona fide purchaser entitled to ITC despite seller’s non‑deposit. Remedy against seller only”.
No collusion; goods actually received and used in business.
Section 16(2) (aa)/(c) cannot be mechanically applied:
McLeod Russel (Gauhati HC, 09.12.2025): Read down; opportunity to prove genuineness mandatory. 2A/2B mismatch no bar.
Banking payment + documents = conclusive proof.
Rule 86A / Section 83 illegal:
No independent “reasons to believe”; borrowed from enforcement report.
Karnataka/Delhi HC: Quashed for no hearing / negative blocking.
Retrospective cancellation u/s 29(2) void:
Del/Cal HC (Ashish Garg, Nikita Agarwal): No reasons in SCN; limited prospectively.
Sections 69/70/132 / 74 misuse:
Prosecution/penalty only if buyer complicit; no material here. SC principle applies.
Drop proceedings; allow ITC.
Unblock ledger u/r 86A; release attachment u/s 83.
Else, stay till adjudication.
Annexures: Invoices, bank statements, e‑way bills, stock proofs, cited judgments.
Conclusion: Urgent Protection Measures for Genuine Taxpayers
The GST regime must evolve from “guilty until proven innocent” to protecting the compliant. Immediate measures:
CBIC SOP: Mandate verification of buyer’s documents before any action; enforce McLeod Russel / Shanti Kiran.
No mechanical ITC denial: 2A/2B mismatch = inquiry trigger only, not denial ground.
Target suppliers first: Mandatory section 76 notice + recovery before touching buyers.
Rule 86A reforms: Time‑bound unblocking; no blocking without hearing.
Prospective cancellations only: Retrospective only with fraud proof + buyer notice.
Grievance portal: Fast‑track for bona fide buyer relief with auto‑stay on demands.
Until these are in place, practitioners must aggressively use writs citing SC/Gauhati precedents. Bona fide buyers: Do not pay a penny without fighting – the law and courts are on your side.
Share this article with clients and forward to local GST Commissioner for course correction.
(References: Full judgments available on TaxGuru, LiveLaw, Taxmann. Tailor facts to your case.)
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By S. PRASAD, GST Practitioner, Mysuru
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