Summary: Under India’s GST regime, a significant challenge known as the “Bona Fide Buyer’s Dilemma” persists. Even when a taxpayer genuinely purchases goods, receives proper invoices, and pays the GST component, they may later face a show-cause notice denying Input Tax Credit (ITC) if the supplier fails to deposit the collected tax. While GST aimed for transparency and simplified compliance through digital tools, it has inadvertently facilitated misuse, including the generation of bogus invoices. These fraudulent invoices, often without actual goods supply, allow firms to wrongfully claim ITC, leading to substantial government revenue loss. A key point of contention is Section 16(2)(c) of the CGST Act, 2017, which mandates that the tax on supply must actually be paid to the government for the recipient to claim ITC. This provision places an unreasonable burden on the recipient to ensure the supplier’s compliance, even in situations beyond their control. Courts, both in India and internationally (like the European Court of Justice), have frequently sided with bona fide recipients, asserting that ITC cannot be denied if the buyer was unaware of any fraud. They emphasize that the law should not compel the impossible and that the burden of a supplier’s non-compliance should not solely fall on the innocent recipient. Despite these judicial interventions, uncertainty continues, highlighting the need for legislative review and a definitive Supreme Court ruling to resolve this ongoing issue.
The Bona Fide Buyer’s Dilemma
A Taxpayer purchases goods, receives the consignment through proper invoices, processes the invoice and pays the amount on the invoice along with the GST component, and files all the returns on time. Everything is done by the statutory provisions. But months later, a shocker arrives at the door of the bona fide recipient “A Show Cause Notice stating that Input Tax Credit ineligible because the supplier failed to deposit the tax”.
The GST Promise: Transparency with a Price Tag
The introduction of the Goods and Service Tax (GST) was hailed as a landmark reform in the erstwhile indirect tax regime from a tangled web of VAT, Service Tax, and CENVAT towards a unified, transparent system. The reform promised to reduce cascading tax effects and increase compliance through digitization, tools like GSTR-1, GSTR-3B for suppliers and GSTR-2A/2B for recipients were introduced to track invoices and input tax credit seamlessly.
Yet, as with many well-intentioned reforms, what began as a tool for transparency revealed itself as a double-edged sword. The same mechanism created to simplify compliance have, over time, facilitated large-scale misuse.
Generation of invoices called bogus invoices
Invoices without actual supply of goods have become a prevalent method for wrongfully availing Input Tax Credit (ITC) under GST. One common modus operandi involves a situation where a purchaser, say A, buys goods from a supplier, B. The supplier quotes a price of ₹1000 for the goods and informs A that if he wants a proper tax invoice, he will have to pay an additional 18% GST. Believing it to be a profitable deal, A chooses not to take the invoice and pays only ₹1000. In reality, this amount already includes the applicable GST, but B does not deposit the tax with the government nor reports the sale in his returns.
Subsequently, B issues a fake invoice for the same transaction to a bogus firm, say C, falsely showing a sale of goods worth ₹1000 along with ₹180 GST. Firm C, despite not having received any goods, uses this bogus invoice to illegitimately claim ITC of ₹180. This fake credit may then be utilized to offset C’s output tax liability or passed further down a chain of fake transactions. In return for issuing this fraudulent invoice, B receives a commission or kickback from C.
This is only one aspect of the issue. Such invoices can be generated by non-existent firms, as is often reported in news related to various ITC scams. This fraudulent mechanism results in a significant loss to the government exchequer, while bona fide recipients and genuine taxpayers are left to face scrutiny and reversals under the current GST framework.
Plight of Bona-fide Recipient
Section 16 of the CGST Act, 2017 lists out various conditions with regards availment of Input tax credit by buyer of goods. In this article, we shall restrict our discussion to the legal validity of Clause (c) of Sub Section 2 of Section 16 of the Act which reads as under:
“subject to the provisions of section 41, 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;”
Section 16(2)(c) of the CGST Act, 2017 is a highly controversial provision and imposes an impossible expectation. It is one of the most litigated clauses in the GST regime, primarily because it places an unreasonable burden on the recipient to ensure not only their own compliance but also to somehow guarantee that the supplier has deposited the tax with the government. This requirement goes against the well-established legal maxim Lex non cogit ad impossibilia, which means that the law does not compel a person to do the impossible.
There are several situations — such as the supplier closing down their business or cancellation of their GST registration — that are entirely beyond the control of a bona fide recipient. Yet, in practice, recipients are being denied Input Tax Credit (ITC) due to non-compliance by the supplier. Such an approach not only defies logic but also violates the fundamental right to equality before the law as guaranteed under Article 14 of the Constitution of India.
Time and again several courts have stepped in to protect the Bona-fide recipients
When examining how this issue is addressed at the international level, the Litdana UAB judgment by the European Court of Justice (ECJ) serves as a significant reference. In this case, the ECJ held that unless the buyer was aware, or ought to have been aware, of the fraud, Input Tax Credit (ITC) cannot be denied. The court emphasized that good faith remains the defining criterion in determining eligibility for credit.
A similar view was echoed in the pre-GST era by the Hon’ble Delhi High Court in a batch of cases including Quest Merchandising India Pvt. Ltd., Suvasini Charitable Trust, Arise India Limited,Vinayak Trexim, K.R. Anand, Aparici Ceramica, Arun Jain (HUF), Damson Technologies Pvt. Ltd., Solvochem, M/s. Meenu Trading Co., and Mahan Polymers vs. Government of NCT of Delhi & Ors. and Commissioner of Trade & Taxes, Delhi & Ors. [TS-314-HC-2017(DEL)] under the VAT regime. The Court categorically held that:
“The purchasing dealer is being asked to do the impossible, i.e., to anticipate the selling dealer who will not deposit with the Government the tax collected by him from those purchasing dealers and therefore avoid transacting with such selling dealers.”
This observation reinforces the principle that the burden of compliance cannot be shifted entirely to the recipient, especially in circumstances beyond their control.
Further, the plight of Bona-fide Recepeint was solidified by the recent judgment of Allahabad High Court in the case of R.T. Infotech Vs Additional Commissioner Grade 2 And 2 Others
“12. Further, the purchasing dealer can also not compel the selling dealer to file the return within stipulated time and deposit the tax collected. The purchasing dealer cannot be left at the mercy of the selling dealer. When the petitioner has discharged his duties diligently, it is the onus upon the assessing authority to duly communicate about the said fact i.e. the purchase has been made through tax invoices and payments have been made through banking channel and therefore, the authority ought to have counterpart of the selling dealer have initiated action and action has been taken with the benefit ought to have given to the petitioner.”
This judgment came as a significant relief for bona fide recipients. The Court placed reliance on Suncraft Energy (Supra) and the case of D.Y. Beathel Enterprises vs. State Tax Officer (Data Cell), Tirunelveli, 2022 (58) G.S.T.L. 269 (Mad.), wherein it was held that a recipient who has paid tax on invoices and complied with the statutory provisions should not be made to suffer solely due to the non-compliance of the supplier.
The Road Ahead
Despite judicial sympathies, uncertainty still persists at the ground level. The department continues to issue notices solely based on return mismatches or the retrospective cancellation of suppliers’ GSTINs, often without examining the conduct or bona fide status of the recipient.
There is a pressing need for the legislature to revisit this legal provision. In light of the contrasting judicial pronouncements, it is imperative that the Hon’ble Supreme Court lays down a final authoritative verdict to put an end to this prolonged and recurring litigation.
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