Section 16(2)(c) of the CGST Act: Constitutionally Valid, Yet Many Open-Ended Questions Remain: From Shanti Kiran to Bhandari Scrap Traders — the ITC denial saga and the questions the judgments leave behind
Summary: The supplied material examines the constitutional and practical controversy surrounding Section 16(2)(c) of the CGST Act, 2017, which conditions Input Tax Credit on the supplier actually paying the tax to the Government. It traces the issue through Commissioner Trade and Tax Delhi v. Shanti Kiran India (P.) Ltd. dated 09.10.2025, Sahil Enterprises v. Union of India dated 06.01.2026, Maruti Enterprise v. Union of India dated 01.05.2026 and Bhandari Scrap Traders v. Union of India dated 24.07.2026. The material states that the Gujarat High Court upheld Section 16(2)(c), relying, among other provisions, on Sections 41(2), 53 and 155 and Rule 37A, and that the Supreme Court affirmed that view in Bhandari Scrap Traders. It also highlights unresolved questions concerning invoice-level verification of supplier tax payment, inter-State settlement, recovery from defaulting suppliers, re-availment of reversed ITC, one-time transactions and supplier litigation. The material notes the Gujarat High Court’s call for legislative amendments and technology-driven verification mechanisms, while observing that the Supreme Court has entertained the SLP against Sahil Enterprises.
1. Introduction
Few provisions of the GST law have generated as much litigation, heartburn and academic debate as clause (c) of Section 16(2) of the CGST Act, 2017 — the condition that a recipient shall be entitled to input tax credit only if the tax charged on the supply “has been actually paid to the Government” by the supplier. For nine years, bona fide purchasing dealers across the country have been asking one simple question: how can I be punished for a default I neither committed nor could have prevented?
Between October 2025 and July 2026, four significant rulings have reshaped this debate: the Supreme Court’s order in Commissioner Trade and Tax Delhi v. Shanti Kiran India (P.) Ltd. [2025] 179 taxmann.com 665 (SC) dated 09.10.2025 (under the DVAT regime); the Tripura High Court’s judgment in Sahil Enterprises v. Union of India [2026] 182 taxmann.com 144 (Tripura) dated 06.01.2026 reading down Section 16(2)(c); the Gujarat High Court’s exhaustive judgment in Maruti Enterprise v. Union of India [2026] 186 taxmann.com 90 (Gujarat) dated 01.05.2026 upholding the provision; and finally the Supreme Court’s order in Bhandari Scrap Traders v. Union of India [2026] 188 taxmann.com 986 (SC) dated 24.07.2026 dismissing the SLP against the Gujarat High Court judgment and affirming it in full.
With the Supreme Court’s affirmation, the constitutional validity of Section 16(2)(c) may appear settled. But in my considered view, the chapter is far from closed. The Supreme Court has itself noted that the SLP against Sahil Enterprises has been entertained. More importantly, even after Maruti Enterprise, a series of very practical, ground-level questions remain unanswered — questions of machinery, of proof, of commercial reality and of fairness. This article walks through the four rulings and then turns to those open-ended questions, which, I believe, must now be answered by the legislature rather than the courts.
2. The Journey in Brief
2.1 Shanti Kiran India (SC, 09.10.2025) — the VAT-era foundation
Under Section 9(2)(g) of the Delhi VAT Act, ITC was available to a purchasing dealer only if the selling dealer had actually deposited the tax with the Government. The Delhi High Court in On Quest Merchandising India (P.) Ltd. v. Government of NCT of Delhi [2017] 87 taxmann.com 179 (Delhi) read the provision down to exclude bona fide purchasing dealers, holding that the law cannot ask the purchaser to do the impossible. The SLP against On Quest was dismissed in Arise India Ltd., and in October 2025 the Supreme Court in Shanti Kiran reaffirmed that where the selling dealer was registered on the date of the transaction and neither the transactions nor the invoices were doubted, the benefit of ITC could not be denied to the bona fide purchaser. The remedy of the Department was to proceed against the defaulting seller.
2.2 Sahil Enterprises (Tripura HC, 06.01.2026) — reading down carried into GST
The Tripura High Court became the second High Court, after Gauhati in National Plasto Moulding, to carry the On Quest reasoning into the GST regime. While upholding the constitutional validity of Section 16(2)(c), the Court read it down: the provision ought not to be interpreted to deny ITC to purchasers in a bona fide transaction, and should apply only where the transaction is found to be not bona fide, collusive or fraudulent. Two aspects of the judgment deserve emphasis. First, the Court squarely differentiated the bona fide purchaser from the collusive one, holding that Parliament’s failure to draw this distinction is precisely what makes an undifferentiated denial of credit vulnerable under Article 14. Secondly, in paragraph 41, the Court categorically observed that none of the High Courts that upheld Section 16(2)(c) — Kerala in M. Trade Links, Patna in Aastha Enterprises, Madhya Pradesh in Shree Krishna Chemicals, Madras in Baby Marine and Andhra Pradesh in Thirumalakonda Plywoods — had examined the practical impossibility for a purchaser to ensure that the seller pays the GST to the Government, when the purchaser has no means whatsoever of checking that fact. That single observation captures the entire grievance of the trade.
2.3 Maruti Enterprise (Gujarat HC, 01.05.2026) — validity upheld
In a batch of over sixty writ petitions, the Gujarat High Court upheld the vires of Section 16(2)(c) and declined to read it down. The Court anchored its reasoning on the Statement of Objects and Reasons of the CGST Bill, 2017, which ties ITC to “taxes paid”; on Section 41(2) read with Rule 37A, which provide for reversal of credit on the supplier’s default and re-availment once the supplier pays; on Section 53, under which the originating State must transfer the tax component to the destination State in inter-State supplies — meaning that credit without payment would compel a State to transfer money it never received; and on Section 155, which places the burden of proving eligibility to ITC on the person claiming it. On this architecture, the Court held that VAT-era precedents including On Quest were inapplicable, that ITC is a statutory concession and not a vested right, and that the plea of double taxation fails because the credit is restored upon the supplier’s payment. Significantly, however, in paragraphs 87 to 89 the Court acknowledged the “dicey situation” of genuine purchasers, called for legislative amendments, a real-time technology-driven mechanism to verify supplier payments invoice-wise, and prompt recovery from erring suppliers instead of compelling purchasers into cumbersome remedies — and expressly recorded its expectation that the Government address the issue of genuine purchasers at the earliest.
2.4 Bhandari Scrap Traders (SC, 24.07.2026) — affirmation, but not the last word
The Supreme Court dismissed the SLP against Maruti Enterprise, expressing complete agreement with the Gujarat High Court. The Court held that the detailed distinction drawn between the DVAT Act and the CGST Act, coupled with the scheme of availing ITC under GST, demonstrates that no parity can be drawn between the two enactments, and that Sections 41, 73 and 74 ensure the purchasing dealer can re-avail reversed ITC once the supplier is made to discharge the tax. Crucially, the very first paragraph of the order records that an SLP against the Tripura High Court’s decision in Sahil Enterprises has been entertained. The constitutional question, therefore, will receive a fuller hearing. It is not a chapter closed; it is a chapter awaiting better representation.
3. The Open-Ended Questions
The Gujarat High Court’s judgment, now affirmed, is legally coherent within the four corners of the statute. Yet the statute itself leaves a series of questions that neither the judgment nor the affirmation answers. These are not academic quibbles; they are the daily reality of every registered person in this country.
3.1 Provisions exist, but where is the machinery? How does a recipient prove that HIS tax was paid?
Section 16(2)(c) read with Section 41(2) makes it mandatory that credit follows actual payment by the supplier. Section 155 then places the burden of proving eligibility on the recipient. But pause and ask: how does a recipient discharge this burden? GSTR-3B is a consolidated, self-declared summary return. It is not invoice-wise. Even where the supplier has filed GSTR-3B, there is no mechanism by which a recipient can demonstrate that the tax relating to his specific invoice stands paid within that consolidated figure. Tomorrow, if the Department were to contend that although GSTR-3B is filed, “your tax” in particular has not been paid — or to call upon the recipient to prove that his invoice was covered in the supplier’s payment — with what evidence does the recipient answer? The supplier’s GSTR-3B is not accessible to him; the payment is not invoice-mapped; the portal offers no certificate of invoice-level tax discharge. The Gujarat High Court itself candidly recognised in paragraph 77 that the filing of GSTR-3B does not inherently guarantee that the tax has been paid in full. The provision exists; the machinery does not. A burden of proof without the means of proof is, in substance, an impossible burden — the very vice the maxim lex non cogit ad impossibilia guards against.
3.2 Inter-State settlement under Section 53 — a fair justification?
The Gujarat High Court distinguished On Quest on the footing that under VAT, credit never crossed the originating State, whereas under GST the destination-based design and Section 53 mean that a supplier’s default has inter-governmental revenue consequences: the originating State would be forced to transfer to the destination State money it never received. As a matter of fiscal architecture, this is accurate. But is it a fair answer to the taxpayer? The inter-State settlement mechanism is an arrangement between the Centre and the States — an internal accounting of the federation. To keep the Government’s revenue account “straight and simple,” can one private taxpayer, who has already paid the tax to his supplier along with the full invoice value, be made to shell out the same amount a second time from his working capital? The design difficulty of the IGST settlement is a problem for the Governments to solve amongst themselves through technology and reconciliation; it cannot become a moral or legal justification for double burden on the one participant in the chain who did everything the law asked of him.
3.3 The recovery machinery exists against the supplier — why is the recipient the easier route?
Where the recipient has paid the supplier in full — value plus tax — the default is entirely that of the supplier. The law arms the Department with formidable powers against him: Sections 73 and 74 for determination, Section 79 for coercive recovery through bank attachment, garnishee proceedings and sale of goods, Section 83 for provisional attachment, and prosecution provisions besides. Under what circumstance can a supplier genuinely resist payment of tax he has admittedly collected? He has no defence on merits; he has pocketed the tax. If the supplies are genuine, the revenue can and will be collected from the supplier — the officers have been given more than enough power to ensure it. When such machinery is available, the easier route of recovering from the recipient — who is visible, compliant, solvent and has already paid once — should never be the preferred route. The Gujarat High Court said as much in paragraph 88, directing that the Government must take prompt and immediate steps for recovery from erring suppliers instead of compelling purchasers into alternate cumbersome remedies. That direction must translate into administrative instructions; otherwise, enforcement will always follow the path of least resistance, and that path leads to the honest taxpayer’s door.
3.4 One-time transactions and the trust deficit — will genuine trade itself fall through?
Commerce is not always a relationship; very often it is a single transaction between strangers. The supplier and recipient may never have met before and may never meet again. Now consider the behavioural consequence of Section 16(2)(c). A prudent recipient — and many are already doing this — lays down a condition: “I will release the tax component only after you first remit the tax to the Government.” But why should a supplier, who has never dealt with this recipient, trust that the payment will actually follow once he has remitted the tax from his own funds? He carries the mirror-image risk. Between the recipient’s fear of losing ITC and the supplier’s fear of losing his money, a trust deficit opens up — and into that deficit, perfectly genuine transactions fall and die. Are we truly conscious that a legitimate supply, beneficial to both parties and to the exchequer, may simply never happen because of this one condition of the GST law? A tax system should facilitate trade, not architect suspicion between counterparties.
3.5 Entitlement by luck, or enforcement by force?
It is trite, and rightly held, that ITC is not an absolute right but a statutory entitlement subject to conditions. But an entitlement, once the recipient has satisfied every condition within his control — registered supplier, tax invoice, receipt of goods, payment of value with tax, invoice reflected in GSTR-2A/2B, return filed — cannot be left to depend on luck or force. Luck, because the recipient is simply fortunate if his supplier happens to pay; unlucky if he does not. Force, because the only “remedy” realistically available to a recipient against a defaulting supplier is pressure — commercial arm-twisting, threats, or engagement of recovery intermediaries of doubtful legality. Are we, through the design of Section 16(2)(c), inadvertently incubating a new industry of private “tax settlement” and recovery agents? A fiscal statute should never leave a compliant taxpayer in a position where his statutory entitlement turns on another person’s conduct which he can influence only by fortune or by coercion.
3.6 Re-availment under the proviso to Section 41(2) — who tells the recipient the supplier has paid?
The entire edifice of Maruti Enterprise rests on the assurance that the recipient is not remediless: reverse now, re-avail later, once the supplier pays. Rule 37A operationalises this. But again — where is the machinery? Suppose the recipient reverses the credit. Two years later, pursuant to a show cause notice, the supplier pays the tax through DRC-03 or recovery proceedings conclude against him. How does the recipient come to know of it? There is no portal alert, no auto-restoration in GSTR-2B, no invoice-level flag informing the recipient that the tax relating to his supply now stands discharged and his re-availment window has opened. The recipient has no access to the supplier’s ledgers or to the Department’s recovery records. The right of re-availment, so heavily relied upon to sustain the provision, is in practice unexercisable without a tracking mechanism. A right without notice of its accrual is a right on paper.
3.7 The Court has interpreted; the legislature must now act
It is not the function of a constitutional court to redesign a fiscal statute; the Court interprets the law as it stands, and the Gujarat High Court did exactly that. But the same judgment, in paragraphs 87 and 88, contains the clearest judicial admission yet that the present design is inequitable in operation. The Court acknowledged the “dicey situation which purchasers are facing,” spoke of the “pressing need for legislative amendments or clarifications… to alleviate the disproportionate financial and administrative burdens currently placed upon purchasers who have an honest claim of ITC,” and called for a “robust, technology-driven tracking mechanism enabling verification of payments made by suppliers against specific invoices in real time.” It even cited with approval the balanced principle of the European Court of Justice in Axel Kittel — that credit may be denied only where the recipient knew or ought to have known of the fraud. The ball is now squarely in the legislature’s court. A pragmatic amendment — whether by invoice-level payment tagging, a statutory safe harbour for recipients who satisfy clauses (a), (aa), (b) and (ba), or a mandated recovery-first protocol against suppliers — is overdue.
3.8 The High Court’s direction on genuine purchasers — a seed for the future
Even while refusing to strike down or read down Section 16(2)(c), the Gujarat High Court did something remarkable in paragraph 89: it recorded, “we expect the Government to address the issue of genuine purchasers at the earliest.” This is not mere obiter courtesy. It is a judicial direction-in-expectation, and it preserves the grievance of the bona fide purchaser as a live policy question even after the constitutional challenge has failed. Read together with the entertained SLP in Sahil Enterprises, it means the distinction between the bona fide purchaser and the collusive purchaser — the heart of On Quest, Shanti Kiran and Sahil Enterprises — remains very much alive in Indian GST jurisprudence.
3.9 When the supplier disputes the tax in litigation — must the credit wait indefinitely?
There is one more scenario the entire re-availment architecture is silent about. Suppose the supplier does not merely default but disputes the very demand — on classification, on valuation, on exemption, on limitation, or on any other ground — and carries the matter into litigation: adjudication, first appeal, the GST Appellate Tribunal, and possibly the High Court and the Supreme Court thereafter. What happens to the recipient’s credit in the interregnum? The proviso to Section 41(2) and Rule 37A restore the credit only “when the supplier pays.” But where the supplier has obtained a stay, or the demand itself is sub judice, no payment will be made for years — a decade is not uncommon in tax litigation. The recipient, who is a total stranger to that lis, is neither a party to it, nor entitled to be heard in it, nor even informed of its progress. Must his working capital remain locked, and his credit remain in suspended animation, for the entire life of someone else’s litigation? And if the supplier ultimately succeeds — the demand is set aside and no tax was ever payable by him — what then is the fate of the credit the recipient reversed with interest? The statute provides no answer, no timeline, and no interest compensation to the recipient for the period of deprivation. A condition whose satisfaction can be deferred indefinitely by a third party’s litigation, over which the recipient has no control whatsoever, only compounds the arbitrariness in operation that the courts have been urged to recognise.
4. Where Does the Law Stand Today?
As matters stand after Bhandari Scrap Traders, Section 16(2)(c) is constitutionally valid and cannot be read down; the Gujarat High Court’s view holds the field, affirmed by the Supreme Court. Recipients must reverse ITC where the supplier has not paid, subject to re-availment under the proviso to Section 41(2) read with Rule 37A. At the same time, the SLP against Sahil Enterprises has been entertained by the Supreme Court, meaning the contrary reading-down view of the Tripura High Court (and the Gauhati High Court in National Plasto Moulding, against which the SLP was dismissed) will be tested on merits. Practitioners defending Section 74 and Section 73 demands founded on supplier default should therefore continue to plead bona fides on facts — registered supplier, genuine movement, banking-channel payment, GSTR-2A/2B reflection — and keep the Shanti Kiran and Sahil Enterprises line of reasoning alive on record, while simultaneously invoking the re-availment architecture and the paragraph 87-89 observations of Maruti Enterprise in mitigation.
5. Conclusion — Make the Law Easy to Implement, Not Dependent on Someone’s Fate
The constitutional battle over Section 16(2)(c) may have been won by the revenue, but the practical war over fairness to the genuine taxpayer is far from over. A recipient who holds a valid invoice from a registered supplier, has received the goods, has paid the full consideration including tax through banking channels, and finds the invoice duly reflected in GSTR-2A/2B, has done everything the law empowers him to do. Whether he ultimately enjoys the credit should not depend on the subsequent conduct — or misconduct — of another person over whom he has no control, no visibility and no lawful leverage. That is not taxation by law; that is taxation by fate.
The Gujarat High Court has shown the way in paragraphs 87 to 89, and the Supreme Court, by entertaining the Sahil Enterprises SLP, has kept the doors open. It is now for the GST Council and Parliament to build the missing machinery: invoice-level visibility of tax payment, automatic intimation and restoration of reversed credit upon supplier discharge, a recovery-first mandate against defaulting suppliers, and a statutory safe harbour for the bona fide purchaser. Make the GST law easy to implement — and let no honest taxpayer’s credit rest on someone else’s fate.
Cases Discussed / Relied Upon
- Bhandari Scrap Traders v. Union of India, [2026] 188 taxmann.com 986 (SC), 24.07.2026 — Supreme Court dismissed the SLP against the Gujarat High Court judgment in Maruti Enterprise and affirmed the validity of Section 16(2)(c).
- Maruti Enterprise v. Union of India, [2026] 186 taxmann.com 90 (Gujarat), 01.05.2026 — Gujarat High Court upheld Section 16(2)(c) and declined to read it down, while acknowledging difficulties faced by genuine purchasers and calling for legislative and technology-driven measures.
- Sahil Enterprises v. Union of India, [2026] 182 taxmann.com 144 (Tripura), 06.01.2026 — Tripura High Court upheld Section 16(2)(c) but read it down for bona fide transactions, applying the condition where the transaction was not bona fide, collusive or fraudulent.
- National Plasto Moulding v. State of Assam, (2024) 8 TMI 836 = 2024 (89) G.S.T.L. 82 (Gauhati) — Gauhati High Court carried the On Quest reasoning into GST and read down Section 16(2)(c) for bona fide purchasing dealers.
- On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi, [2017] 87 taxmann.com 179 (Delhi), 26.10.2017 — Delhi High Court read down the corresponding DVAT provision to protect bona fide purchasing dealers where the selling dealer failed to deposit tax.
- Commissioner of Trade and Taxes Delhi v. Arise India Ltd., SLP (C) No. 36750 of 2017, 10.01.2018 — Supreme Court dismissed the SLP against the On Quest judgment, forming part of the VAT-era foundation discussed in the material.
- Commissioner, Trade and Tax, Delhi v. Shanti Kiran India (P.) Ltd., [2025] 179 taxmann.com 665 (SC), 09.10.2025 — Supreme Court, under the DVAT regime, reaffirmed protection for a bona fide purchaser where the selling dealer was registered and the transactions and invoices were not disputed.
- M. Trade Links v. Union of India, [2024] SCC OnLine Ker 2744 (Kerala) — cited as a decision upholding the strict operation of Section 16(2)(c) and treating ITC as a statutory concession subject to prescribed conditions.
- Nahasshukoor v. Assistant Commissioner, [2023] SCC OnLine Ker 11369 (Kerala) — cited as part of the strict-operation line concerning the statutory conditions for ITC.
- Thirumalakonda Plywoods v. Assistant Commissioner, [2023] SCC OnLine AP 1476 (Andhra Pradesh) — cited as a decision upholding the statutory condition for ITC under Section 16(2)(c).
- Astha Enterprises v. State of Bihar, [2023] SCC OnLine Pat 4395 (Patna) — cited as a decision adopting the strict approach to Section 16(2)(c).
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Disclaimer: The views expressed are the personal views of the author based on the judgments discussed and are intended for academic and professional discussion only. Readers are advised to evaluate the applicability of the rulings to their own facts before acting upon them.
