Section 16(2)(c) and 180 Day Rule: How GST Makes Genuine Buyers Pay Twice

Killing the honest to catch the dishonest – that is exactly what section 16(2)(c) combined with the 180-day payment rule is doing today. It forces a genuine buyer to pay the supplier on time, then still threatens to take away ITC if the supplier cheats and does not pay the Government

1. The basic “Catch-22” built into section 16

The structure of section 16 looks simple on paper: if you are a registered person, and you buy goods or services for your business, you can take ITC – provided you satisfy certain conditions. Two of those conditions are at the heart of the present crisis:

1. Second proviso to section 16(2) –

You must pay the supplier value plus tax within 180 days, otherwise you have to reverse ITC with interest.

2. Section 16(2)(c) –

The supplier must actually pay the tax to the Government (through GSTR-3B in cash or via ITC). If he does not, the department says your ITC fails.

So, the buyer is told:

• “You must pay your supplier in 6 months, otherwise we’ll take away your ITC plus interest.”
• Even after you do that faithfully, if the supplier pockets the tax and does not pay to Government, the department says:
  • “We’ll again take away your ITC (or make you reverse it under Rule 37A) because 16(2)(c) is not satisfied.”

That is the Catch-22: you obey the law, but you still get punished for another man’s disobedience.

2. Double recovery and unjust enrichment: same tax taken twice

On the department’s own theory, in a supplier-default situation it has two live targets for the same tax:

• the supplier, who collected tax and did not pay, and
• the buyer, whose ITC is now being denied.

Nothing in the law stops the department from:

• demanding the entire output tax from the supplier (with interest and penalty) under sections 73/74, and simultaneously
• forcing the buyer to reverse ITC with interest, and often levy penalty on the buyer also.

This is what many authors call “double dipping” – the State is effectively recovering the same tax twice, once from the man who collected it and once from the man who already paid it in the price.

In principle, Article 265 of the Constitution allows tax only with authority of law. When tax has already been collected from the buyer and is again collected in the form of ITC denial, while the State still has the right to recover from the supplier, it is very hard to say this is fair or proportionate.

3. Why section 16(2)(c) is an “impossible” condition for buyers

Under GST, the buyer has no statutory power to inspect or control the supplier’s compliance. The buyer:

• cannot log into the supplier’s portal,
• cannot see his electronic cash ledger,
• does not know whether his 3B liability is being actually discharged.

All that a genuine buyer can realistically do is:

• check that the supplier’s GSTIN is active,
• ensure that invoices are proper,
• verify that the invoice appears in GSTR2B,
• receive the goods/services,
• pay via banking channels.

Beyond that, he has no “police power” to force the supplier to pay the Government. This is exactly where the doctrine of impossibility (lex non cogit ad impossibilia) comes in: the law does not compel a person to do that which is impossible or beyond his control.

Several authors and courts have started to say this openly:

• Section 16(2)(c) puts the buyer in charge of something he does not control, namely the supplier’s tax deposit.
• It forces him to monitor dozens of supplier’s month after month, which is practically impossible for small and medium businesses.

4. The 180-day payment rule makes it worse

The second proviso to section 16(2) adds one more layer of pressure:

• If you do not pay supplier within 180 days from invoice date, you must add back ITC to your output tax and pay interest from the date of availment.

This means:

• The law forces you to pay the supplier quickly, even if your own customer has not yet paid you.
• Once you pay, you have no leverage left over the supplier, but you still remain at risk under 16(2)(c) if he does not remit the tax.

So, the buyer is squeezed from both sides:

• Pay supplier or lose ITC and pay interest,
• Pay supplier and still risk losing ITC if supplier cheats.

This is not just harsh; it is irrational from the buyer’s standpoint.

5. Rule 37A and section 41 – the “temporary credit” illusion

After these problems were highlighted, Parliament amended section 41 and the Government inserted Rule 37A.

The scheme is:

• ITC is available provisionally when invoice is in 2B.
• If supplier does not file 3B and pay the tax by 30 September following the FY, the buyer must reverse that ITC by November.thetaxcorp+1
• If supplier later pays, the buyer can re-avail ITC.

On paper, this looks like a solution: ITC is parked temporarily until tax is deposited. In practice, it is just another way of shifting risk and cash flow burden to the buyer:

• The buyer has to track each supplier’s compliance almost in real time to know whether 37A reversal will hit.
• If supplier never pays (absconds, becomes NGTP, goes into insolvency), the buyer’s ITC is gone permanently.
• If supplier pays after a long delay, the buyer gets ITC back—but after suffering years of interest, litigation and working capital stress.

So, Rule 37A is not a cure; it simply formalises the “buyer pays first, chases later” model.

6. What courts are saying – two opposite trends

On section 16(2)(c), the judiciary is now clearly split into two camps.

6.1 Strict view – Gujarat, Kerala and some others

• Gujarat High Court – Maruti Enterprise v. Union of India (2026)

Upheld full validity of section 16(2)(c) and refused to read it down for bona fide buyers. It said ITC is a concession, legislature can insist on the supplier having paid the tax, and Rule 37A is the mechanism to handle default.

• Kerala High Court – M. Trade Links and allied matters

Upheld the constitutional validity of sections 16(2)(c) and 16(4), treating ITC as a concession and not giving a broad “bona fide buyer” escape in the way Tripura and Karnataka have.

This line basically accepts that even genuine buyers’ ITC can be denied if supplier does not pay, as long as the statute says so.

6.2 Protective view – Tripura, Karnataka, Allahabad, Gauhati, etc.

On the other side, a strong line of cases has emerged which protect bona fide purchasers.

• Tripura High Court – Sahil Enterprises v. Union of India (2026)
  The Court upheld validity of section 16(2)(c) but read it down, holding that:
  • the provision should apply only where the transaction is not bona fide or is collusive/fraudulent, and
  • where the purchasing dealer has proved genuine transaction and payment of GST to seller, ITC cannot be denied merely because the seller failed to deposit tax.
• Karnataka High Court – Instakart Services Pvt Ltd v. State of Karnataka (2026)
  Karnataka HC took the same line:
  • ITC cannot be denied to a bona fide purchaser who has complied with section 16(2) merely due to supplier’s default.
  • Section 16(2)(c) and Rule 36(4) were read down so they do not penalise genuine buyers; denial is justified only in fraud/collusion/non-genuine transactions.
  • Department must proceed against defaulting supplier, not punish purchaser.
• Allahabad High Court – Saniya Traders, Safecon Lifescience and others

Relying on Supreme Court in Shakti Karan India Ltd. (a Delhi VAT matter) and other rulings, Allahabad HC held that where the seller was registered at the time, goods were actually supplied, invoices were genuine and consideration was paid, ITC should not be denied merely because seller defaulted or his registration was later cancelled.

• Gauhati High Court – reading down 16(2) (aa)

Gauhati HC held that ITC cannot be denied solely due to supplier’s failure to upload details in GSTR1 where buyer is bona fide. Although the specific subsection is 16(2)(aa), the reasoning equally questions harsh application of 16(2)(c).

This second line clearly says:

“Do not make the buyer pay twice. Go after the real defaulter.”

7. Supreme Court signal – Shanti Kiran and the principle against punishing the innocent

Under the earlier VAT regime, the Supreme Court in Commissioner of Trade & Taxes v. Shanti Kiran India (P) Ltd. (Delhi VAT) laid down a very important principle:

• If on the date of transaction the selling dealer was registered,
• the transaction and invoice were genuine,
• goods were actually supplied, and
• the buyer paid consideration including tax through proper channels,

then input credit cannot be denied merely because the seller later defaulted in paying tax. The remedy of the department is to proceed against the delinquent seller.

This principle has been picked up by several High Courts (Allahabad, Tripura, Karnataka) and used to soften the impact of section 16(2)(c), even though GST is a different statute.

8. How genuine taxpayers can survive in this environment

The honest answer is that the system today is not easy on genuine taxpayers. But some practical lines of defence are available.

8.1 Build a strong “bona fide buyer” file

For every major supplier, genuine buyers should:

• Keep copies of GST registration, PAN, address, etc.
• Maintain invoices, e-way bills, GRNs, stock records, and
• Preserve bank payment proofs.

This is the factual backbone for invoking pro-buyer case law in court: you prove genuineness to shift the court’s mind away from 16(2)(c) and towards fairness.

8.2 Check supplier profile periodically (but don’t become the police)

For key suppliers:

• Check GSTIN status (active/suspended/cancelled) and last return filing date.
• If a large supplier suddenly stops filing 3B, treat further purchases as high risk until clarity emerges.

You cannot monitor every small supplier daily, but you can at least avoid well-known red flags.

8.3 When a default surfaces – choose your strategy

If you receive:

• a Rule 37A auto-intimation, or
• a DRC-01 / ASMT-10 saying “supplier did not pay, reverse ITC”,

you have three broad options:

1. Reverse under protest and continue business (to avoid cash-flow strangulation), then challenge the matter in appeal/writ based on Tripura/Karnataka/Allahabad line.

2. Contest on facts from the start if amount is large and your State’s High Court is buyer-friendly.

3. In extreme NGTP fraud chains, negotiate an amicable settlement and use litigation energy for strongest cases only.

None of these are perfect, but they are better than doing nothing.

8.4 Collective and policy action

Professionals also need to do more collective advocacy:

• Articles, representations to GST Council and State governments, bar associations, etc., making it clear that section 16(2)(c) as applied today is damaging honest trade.
• Pointing out that section 76 (tax collected but not paid to Government) and powerful recovery and prosecution tools already exist against defaulting suppliers; there is no need to use buyers as “secondline guarantors” of tax.

In the long run, only a clear Supreme Court ruling or an amendment can truly settle this.

10. Closing thought in my voice:

As things stand today, a genuine taxpayer who buys with proper invoice, pays the supplier on time as required by the second proviso to section 16(2), and uses the goods in his business is still not safe. If the supplier becomes NGTP, or simply does not pay tax, the buyer’s ITC is the first casualty. The law that was supposed to give “seamless credit” has, through section 16(2)(c) and Rule 37A, turned into a maze where honest buyers spend more time defending past credits than planning future business.

Some High Courts like Gujarat and Kerala have chosen to read the provision literally and leave the hardship to policy. Others like Tripura, Karnataka, Allahabad and Gauhati are trying to restore balance by reading down the harshness and insisting that the Revenue first punish the real defaulter. Until the Supreme Court steps in and gives a final word, genuine taxpayers will continue to live with this uncertainty – running profitable businesses on one side and fighting ITC battles on the other, hoping that one day the law will clearly say what common sense already knows: you cannot punish the innocent for the sins of the guilty.