Why Section 76 of GST Law Protects Bona Fide Purchasers from ITC Denial

The Unexplored Remedy: Why Section 76 Compels Reading Down of Section 16(2)(c)

ABSTRACT

The denial of Input Tax Credit (ITC) to bona fide purchasers on account of a supplier’s default in depositing tax with the Government has emerged as the most contentious battleground under the GST regime. Section 16(2)(c) of the CGST Act, 2017 conditions ITC eligibility upon actual payment of tax by the supplier — an event entirely outside the purchaser’s control, knowledge, or verification.

Simultaneously, the statute furnishes a non-obstante, complete recovery mechanism in Section 76 directed specifically at defaulting suppliers — a remedy the Department has, for reasons best known to it, consistently avoided invoking, preferring instead to deny ITC to innocent purchasers. This article argues that the existence of Section 76, read with the legislative intent behind Section 149 (compliance rating) and Section 159 (publication of defaulters), alongside the optimal deployment of BIFA and the unimplemented safeguards of Sections 149 and 159, presents a far more coherent, equitable, and statutorily faithful alternative. The strict application of Section 16(2)(c) against bona fide purchasers, when these precise and powerful remedies remain untouched, is not only disproportionate but also doctrinally indefensible and constitutionally impermissible.

Drawing upon three landmark High Court judgments — the Jharkhand High Court in R.K. Transport (2025) which authoritatively interpreted Section 76 as a complete, non-obstante remedy applicable to “every person” without jurisdictional limitation, the Karnataka High Court in Instakart Services (2026) along with the established trajectory from On Quest, Arise India, Shanti Kiran, National Plasto Moulding, and Sahil Enterprises, and critically examining the recent Gujarat High Court Judgment in Maruti Enterprises (2026) and anchored in Supreme Court precedents endorsing the reading-down approach, this article constructs the complete statutory and constitutional case for protecting genuine purchasers, while proposing a structural framework for a level playing field using the unimplemented provisions of Sections 149 and 159 and the asymmetrically accessed BIFA software.

I. Introduction: The Legal Paradox – Why the Compliant Purchaser Pays Twice (and How Section 76 Resolves It)

Under the GST regime, Input Tax Credit is the oxygen of seamless commerce. The principle is straightforward: tax paid on inputs at every stage of the supply chain should be available to offset output liability, ensuring that tax is levied only on the value added at each stage. Section 16(2)(c), however, introduces a condition that has become the source of profound injustice in practice.

The provision mandates that ITC can be availed by the purchaser only if “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.” The statutory obligation of depositing the tax, however, rests entirely and exclusively with the supplier — not the purchaser.

The structural flaw is this: Section 16(2)(c) makes the purchaser’s right conditional upon the supplier’s compliance, while giving the purchaser no legal tool, no access to information, and no mechanism to ensure or verify that compliance.

The result is a legal paradox: a purchaser who has paid tax in good faith to a registered supplier, received goods or services, obtained a genuine invoice, and filed its returns correctly — a purchaser who has done everything the law requires — stands to lose its ITC if the supplier, for any reason, fails to deposit the tax. The purchaser is punished for another’s crime.

This article demonstrates that the legislative scheme itself provides a complete answer through Section 76 — a provision of remarkable width that creates an overriding, non-obstante duty upon the Department to recover directly from defaulting suppliers. The simultaneous failure to implement Section 149 (GST compliance rating) and Section 159 (publication of defaulters), coupled with the asymmetrical access to BIFA (Business Intelligence and Fraud Analytics) software, has created a regime where the Department possesses x-ray vision while the bona fide purchaser remains blindfolded — and is then penalized for not seeing the danger that only the Department could detect.

The Supreme Court’s endorsement of the reading-down approach in Commissioner of Trade and Tax, Delhi v. Shanti Kiran India (P) Ltd. (2025) and Commissioner of Trade and Taxes, Delhi v. Arise India Ltd. (2018), rendered in the context of analogous VAT provisions, lays down a constitutional principle that transcends the specific statute: a taxpayer who has acted bona fide, purchased from a registered supplier, paid consideration including GST, and discharged its own output liability, should not be deprived of ITC merely because the supplier defaulted. This principle, as this article argues, applies with equal — indeed, stronger — force under the GST framework.

II. Section 76: The Complete Code for Recovery from Defaulting Suppliers:

2.1 The Anatomy of a Powerful Provision

Section 76 of the CGST Act — titled ‘Tax Collected but Not Paid to Government’ — is a provision of deliberate breadth, designed to address precisely the mischief of a supplier retaining tax collected from a purchaser. Its opening sub-section is remarkable in its sweep:

Section 76 (1) “Notwithstanding anything to the contrary contained in any order or direction of any Appellate Authority or Appellate Tribunal or court or in any other provisions of this Act or the rules made thereunder or any other law for the time being in force, every person who has collected from any other person any amount as representing the tax under this Act, and has not paid the said amount to the Government, shall forthwith pay the said amount to the Government, irrespective of whether the supplies in respect of which such amount was collected are taxable or not.”

(2) Where any amount is required to be paid to the Government under sub-section (1), and which has not been so paid, the proper officer may serve on the person liable to pay such amount a notice requiring him to show cause as to why the said amount as specified in the notice, should not be paid by him to the Government and why a penalty equivalent to the amount specified in the notice should not be imposed on him under the provisions of this Act.

(3) The proper officer shall, after considering the representation, if any, made by the person on whom the notice is served under sub-section (2), determine the amount due from such person and thereupon such person shall pay the amount so determined.

(4) The person referred to in sub-section (1) shall in addition to paying the amount referred to in sub-section (1) or sub-section (3) also be liable to pay interest thereon at the rate specified under section 50 from the date such amount was collected by him to the date such amount is paid by him to the Government.

(5) An opportunity of hearing shall be granted where a request is received in writing from the person to whom the notice was issued to show cause.

(6) The proper officer shall issue an order within one year from the date of issue of the notice.

(7) Where the issuance of order is stayed by an order of the court or Appellate Tribunal, the period of such stay shall be excluded in computing the period of one year.

(8) The proper officer, in his order, shall set out the relevant facts and the basis of his decision.

(9) The amount paid to the Government under sub-section (1) or sub-section (3) shall be adjusted against the tax payable, if any, by the person in relation to the supplies referred to in sub-section (1).

(10) Where any surplus is left after the adjustment under sub-section (9), the amount of such surplus shall either be credited to the Fund or refunded to the person who has borne the incidence of such amount.

(11) The person who has borne the incidence of the amount, may apply for the refund of the same in accordance with the provisions of section 54.

The key features of Section 76, understood in their proper legal context, are set out below:

2.2 Section 76(10): The Legislature’s Express Recognition of the Purchaser’s Injury

Sub-section (10) of Section 76 is often overlooked but is constitutionally pivotal. It provides that any surplus recovered from the supplier, after adjustment of the supplier’s own liability, shall be refunded to the person who has ‘borne the incidence’ of such amount. The ‘person who has borne the incidence’ is unmistakably the bona fide purchaser — the party who paid the tax to the supplier.

The legislative intent is, therefore, expressed in unmistakable terms: the supplier is the wrongdoer; Section 76 is the weapon against the wrongdoer; and upon successful recovery, the purchaser who suffered the loss is to be made good. This two-step statutory scheme — recover from supplier, restore to purchaser — renders the denial of ITC to the purchaser not merely unnecessary, but legally perverse. It amounts to a double recovery by the State that the statute itself expressly forbids.

2.3 Section 76: Distinguishing the Purchaser’s Duty from the Supplier’s Obligation

Section 76 yields an important inference about the scope of the purchaser’s evidential burden in the context of Section 16(2)(c). The provision targets every person who has ‘collected’ tax and ‘not paid’ it. The operative act of collection is the transaction between supplier and purchaser — the payment of the tax component by the purchaser to the supplier.

From the scheme of Section 76, it is clear that the purchaser’s burden is exhausted upon proving that payment of the tax element was made to the supplier. Once this is established, the further question — whether the supplier deposited it — falls exclusively within the domain of Section 76, not Section 16(2)(c). The purchaser cannot be expected to prove a fact that Section 76 itself treats as the supplier’s exclusive obligation. o demand otherwise would be to obliterate the fundamental distinction between the purchaser’s duty (to pay the tax component to the supplier) and the supplier’s duty (to remit that tax to the Government) — a distinction that lies at the very foundation of the entire GST architecture.

This distinction is not merely theoretical; it is embedded in the statutory scheme. The GST Act separately identifies the taxable person under Section 9(1) (the supplier), separately provides for collection of tax by registered persons under Section 31, separately mandates payment through electronic ledgers, and separately creates an overriding recovery mechanism in Section 76 for defaulting suppliers. To conflate these distinct obligations would be to disregard the Act’s own structural integrity.

2.4 The Jharkhand High Court in R.K. Transport & Constructions Ltd. (2025): Section 76 in Action

The practical significance of Section 76 was authoritatively demonstrated by the Jharkhand High Court (Division Bench) in M/s R.K. Transport & Constructions Limited v. State of Jharkhand[1].

The facts were stark. The petitioner had paid GST of Rs. 11,17,703/- to its supplier (the 6th respondent, M.B. Enterprises) for hiring commercial motor vehicles during the financial year 2020-21. The supplier raised six invoices including CGST and SGST components, received full payment including tax, but never filed its GSTR-1 return. Consequently, the tax never appeared in the petitioner’s GSTR-2A, and the petitioner could not avail the ITC it had legitimately paid.

When the petitioner approached the State Tax authorities, they declined to act on the ground that the supplier fell under the jurisdiction of the Central GST authorities. The Court, presided over by the Chief Justice, disposed of this plea with decisive clarity:

“This stand taken by the official respondents is contrary to Section 76(1) of the Jharkhand GST Act, 2017 which mandates that ‘every person who has collected from any other person any amount as representing GST, and had not paid the said amount to the Government, shall forthwith pay it to the Government’… Thus action can be taken under sub-section (2) of section 76 against ‘every person’ including a person not registered under the JGST Act, 2017.”

“It is not permissible for the official respondents to contend that they need not do anything since the 6th respondent is registered with the CGST authorities. It is their bounden duty to take action against the 6th respondent under sub-section (2) of Section 76 forthwith and there is no valid excuse for its inaction.”

The Court allowed the writ petition, directed the State Tax authorities to complete proceedings under Section 76 within eight weeks, and imposed costs of Rs. 1,00,000/- on the defaulting supplier to be paid to the petitioner.

R.K. Transport establishes the following critical principles that are universally applicable:

• Section 76 applies to ‘every person’ — there is no jurisdictional bar based on the supplier’s registration with another State or Central GST authority.
• The ‘proper officer’ cannot plead helplessness or jurisdictional limitation when Section 76 arms him with a complete remedy.
• The State-Centre jurisdictional argument is wholly untenable — the duty to act under Section 76 is mandatory, not discretionary.
• Inter-authority coordination is the Department’s administrative obligation, not the purchaser’s problem.
• A bona fide purchaser has locus standi to compel the authorities to initiate proceedings under Section 76 against a defaulting supplier.

2.5 Bhawani Cotton Mills Mandate and the Fallacy of Re-availment: Why Future Refund Does Not Cure Present Illegality

The Supreme Court in Bhawani Cotton Mills v. State of Punjab, [2] laid down a fundamental proposition: a person who is not liable to pay tax cannot be compelled to pay it in the first instance merely because a possible refund may become available at some uncertain future date. Such an exercise is not only administratively futile but also constitutionally impermissible.

Applying this principle to the GST framework, the purchasing dealer is not the taxable person under Section 9(1) of the CGST Act. The statutory liability to pay tax on the supply rests exclusively with the supplier. The purchaser’s obligation is limited to paying the consideration — including the tax component — to the supplier. The supplier then steps into the position of the Government’s collecting agent.

To demand that the purchaser reverse its Input Tax Credit — which is, in economic substance, equivalent to requiring the purchaser to pay the tax a second time — and then to hold out the uncertain prospect of re-availment under Rule 37A if the supplier eventually pays, is precisely the futile and constitutionally invalid exercise that the Supreme Court condemned in Bhawani Cotton Mills.

III. Judicial Consensus on Reading Down: What the High Courts Held – and What They Missed

Three High Courts have, in recent years, delivered significant judgments on the constitutional validity of Section 16(2)(c). Each reading-down judgment endorses the protection of bona fide purchasers. However — and this is the critical doctrinal gap this article addresses — none of them examined the interplay of Section 16(2)(c) with Section 76. The existence of Section 76 as a complete, non-obstante remedy against the defaulting supplier provides an additional, independent, and powerful ground for reading down Section 16(2)(c) that these courts did not consider.

IV. The Missing Link: The Interplay of Section 76 and Section 16(2)(c): Why Reading Down Under GST Is a Constitutional Imperative:

All three High Courts read down Section 16(2)(c) on constitutional grounds — the impossibility of compliance, the failure to distinguish between bona fide and fraudulent purchasers, and the violation of Articles 14 and 265. However, what these judgments did not examine is a statutory argument that is perhaps even more powerful: the existence of Section 76 as a complete, non-obstante, direct remedy against the defaulting supplier.

If Section 76 arms the Department with a mechanism to recover the unpaid tax directly from the supplier — including interest under Section 76(4) and a penalty equivalent to the tax amount under Section 76(2), and further provides for a refund to the purchaser who bore the incidence under Section 76(10) — then denying ITC to the bona fide purchaser is not merely arbitrary and disproportionate. It is entirely unnecessary. The revenue is fully protected because the Department can recover the exact same amount from the actual wrongdoer.

The legal maxim ubi jus ibi remedium — where there is a right, there is a remedy — applies with full force. The Department possesses a complete statutory right to recover from the supplier under Section 76. Having failed to pursue that right, and having allowed that inaction to crystallize into a refusal to act (as the Jharkhand High Court found in R.K. Transport), the Department cannot be permitted to create a new liability against an innocent third party under Section 16(2)(c). To permit such an action would render Section 76 — particularly its refund mechanism under sub-sections (10) and (11) — completely otiose.

Furthermore, the non-obstante clause of Section 76(1) is not merely a procedural priority indicator. It overrides “any other provisions of this Act or the rules made thereunder.” This means that when the specific mischief of supplier non-payment arises, Section 76 takes precedence. The Department is obligated to pursue Section 76 against the wrongdoer before invoking Section 16(2)(c) against the victim. As the Jharkhand High Court implicitly recognized in R.K. Transport, the Department cannot plead helplessness when the statute arms it with a powerful weapon.

IV.1. Why the GST Context Makes the Reading-Down Argument Even Stronger:

Under the VAT regimes, the constitutional argument rested primarily on the absence of any mechanism for the purchaser to verify supplier compliance. Under GST, the argument is stronger because:

• The GST framework is more centralized and technology-driven than VAT, meaning the Department has even more information about supplier defaults than it did under VAT — yet the purchaser’s access remains zero.
• Section 76 of the CGST Act, with its non-obstante clause and “every person” language, is a more powerful recovery provision than anything available under most State VAT Acts — making the argument from the statute’s own internal scheme considerably stronger.
• The GSTN portal, BIFA, and the Invoice Management System (IMS) collectively provide the Government with real-time visibility into supplier compliance that simply did not exist under VAT — making the asymmetry of information more pronounced, not less.
• The GST Council’s minutes of the 26th meeting (held on 10.03.2018) acknowledge the “difficulties faced by genuine purchasers” due to Section 16(2)(c) — a rare legislative acknowledgment of the very hardship the reading-down cases seek to address.

V. The Unimplemented Safeguards: Sections 149, 159, and BIFA — The Government’s Broken Promises

5.1 Section 149: Compliance Rating — Enacted in 2017, Dead Letter in 2026

Section 149 of the CGST Act, 2017 mandates that every registered person may be assigned a GST compliance rating score based on their record of compliance, which shall be updated at periodic intervals and ‘placed in the public domain in such manner as may be prescribed.’ The parliamentary intent is unmistakable: to create a publicly accessible, dynamic system of supplier reliability assessment that would enable purchasing dealers to make informed choices.

As of the date of this article — nearly nine years since the GST Act came into force — Section 149 has never been operationalized. The rules prescribing the parameters, methodology, and manner of publication have not been notified. This legislative promise remains entirely unfulfilled.

The constitutional consequence of this failure is severe. The Department cannot take advantage of its own default. A party that has failed to implement a statutory protection cannot then penalize the beneficiary of that protection for the consequences that non-implementation was designed to prevent. The Latin maxim ‘commodum ex injuria sua nemo habere debet’ applies: no person shall gain advantage from their own wrong.

Had Section 149 been implemented, the purchasing dealer could have checked the compliance rating of a supplier before entering into a transaction or before claiming ITC in its GSTR-3B. A poor or deteriorating rating would have flagged the supplier as high-risk. The Government’s failure to create this mechanism is not a neutral fact — it is an active cause of the purchaser’s inability to protect itself.

5.2 Section 159: Publication of Defaulters — The Power That Lies Idle

Section 159 of the CGST Act empowers the Commissioner to publish, in the public interest, the names and particulars of persons who are the subject of proceedings or prosecution under the Act. The Explanation to Section 159 extends this to partners, directors, managing agents, secretaries, and managers — recognizing that entity-level disclosure must reach individuals who control corporate wrongdoing.

The interplay between Sections 149 and 159 is architecturally significant. Section 149 provides the proactive mechanism — compliance ratings that prevent a purchaser from ever dealing with a high-risk supplier. Section 159 provides the reactive mechanism — public disclosure after default is established, creating a market deterrent and enabling other purchasers to avoid blacklisted suppliers. Together, these two provisions constitute the legislature’s intended framework for supplier risk management. Neither has been deployed with any vigour against defaulting suppliers.

If Section 159 were actively used to publish suppliers who collect GST and fail to remit it, the commercial consequences would be significant. Bona fide purchasers would avoid such suppliers. Financial institutions would be alerted. The market itself would create a self-correcting mechanism. The Department’s failure to deploy this tool, while simultaneously denying ITC to purchasing dealers, is an illustration of the profound asymmetry of power and information at the heart of this dispute.

5.3 BIFA: The Department’s Eye, the Purchaser’s Blindfold

Business Intelligence and Fraud Analytics (BIFA) is an AI-powered, machine learning-driven analytical platform developed by GSTN in partnership with Infosys. The Department has full, real-time, unrestricted access to BIFA. The purchasing dealer has zero access.

The Department uses BIFA to retroactively target purchasing dealers for their suppliers’ defaults. But it refuses to use BIFA proactively to flag or delist high-risk suppliers before they victimize bona fide purchasers. This is not a level playing field. The Department has x-ray vision; the purchaser is blindfolded. The regulated party is blamed for not seeing what only the regulator could see.

This asymmetry has direct Article 14 implications. The constitutional guarantee of equality before law is not merely a guarantee of equal treatment by courts — it includes equal access to the information necessary to exercise one’s statutory rights. A system that withholds from purchasers the very tools required to protect themselves, while penalizing those purchasers for the consequences of that withholding, is manifestly arbitrary.

The GSTN has, of late, developed the Invoice Management System (IMS), which gives some degree of control to the purchaser over inward invoices. This is a step in the right direction — but it does not solve the fundamental problem of the purchaser’s inability to verify whether the supplier has deposited the tax in its GSTR-3B. A payment confirmation indicator — a simple flag on the GST portal showing whether a particular invoice’s tax has been remitted by the supplier — would go a long way toward levelling the playing field. The GSTN has the technical capability; what is lacking is the regulatory will.

VI. The Gujarat High Court in Maruti Enterprises: Important, But Not the Final Word

The Gujarat High Court (Division Bench) in Maruti Enterprises v. Union of India[6],  upheld the constitutional validity of Section 16(2)(c) and declined to read it down. The Court held that the provision is ‘clear, self-explanatory and unambiguous,’ that its underlying intent is to protect government revenue, and that the GST regime’s destination-based structure means that any reading-down would have ‘cascading fiscal consequences across state boundaries.’

The judgment is significant and merits careful analysis. However, it is subject to important criticisms that limit its persuasive authority — and, notably, contains several observations that actually support the case being made in this article.

6.1 What the Gujarat High Court Did Not Consider

6.2 Where the Gujarat High Court Supports the Purchaser’s Case

Despite upholding Section 16(2)(c), the Gujarat High Court made observations of significant importance that should be noted by every practitioner:

“The Court acknowledge[s] the genuine concerns of the petitioners regarding the hardship faced by bona fide purchasers due to the supplier’s default.”

“The Government is urged to undertake a comprehensive re-evaluation of the situation and implement a robust, technology-driven tracking mechanism to alleviate the disproportionate burdens on purchasers.”

“The Government is directed to take prompt steps for the recovery of tax from the erring suppliers, instead of compelling the purchasers to avail themselves of alternate cumbersome remedies.”

These observations constitute a judicial acknowledgment of (a) the hardship caused to bona fide purchasers, (b) the disproportionate burden currently imposed on them, and (c) the imperative that the Government recover from suppliers rather than from purchasers. The Court has, in effect, conceded the factual premise of the reading-down argument while declining to apply its constitutional consequence — a logical tension that courts in subsequent proceedings are entitled to examine.

Furthermore, the Gujarat High Court placed reliance on the mechanism of Section 41(2) read with Rule 37A — which allows ITC reversal with subsequent re-availment once the supplier deposits tax. This mechanism, however, effectively shifts the State’s statutory burden of recovery onto the purchaser. The State, armed with coercive powers under Section 76, is statutorily obligated to recover from the defaulting supplier. By instead demanding reversal from the purchaser and holding out the uncertain prospect of future re-availment, the Department seeks to transform the purchaser — who bears no statutory liability for the supplier’s default — into an unpaid guarantor of the supplier’s compliance. This is precisely the futile and constitutionally impermissible exercise condemned by the Supreme Court in Bhawani Cotton Mills: a person who is not liable to pay tax cannot be compelled to pay it in the first instance merely because a possible refund may become available at some uncertain future date. The Gujarat High Court’s acceptance of this mechanism as adequate protection for the purchaser is, therefore, contestable on both legal and factual grounds.

VII. The Burden of Proof Framework: Section 155, the Evidence Act, and Section 76

7.1 What Section 155 Actually Requires

Section 155 of the CGST Act places the burden of proving eligibility for ITC on the person claiming such credit. This provision is often overstretched by field formations to require the purchaser to prove facts entirely outside its domain. The correct reading of Section 155 is as follows:

• Section 155 is a gatekeeper — it places the initial burden of establishing eligibility on the claimant. It does not convert the purchaser into the guarantor of the entire tax chain.
• ‘Eligibility’ must be read harmoniously with the conditions in Section 16(2). Clauses (a), (aa), (b), and (ba) of Section 16(2) — dealing with tax invoice, return matching, receipt of goods, and ITC communication — are matters within the purchaser’s domain. Once those are proved, the purchaser has discharged its burden under Section 155.
• Clause (c) — actual payment by the supplier — is a fact exclusively within the knowledge of the supplier and the GST system. Section 106 of the Evidence Act, 1872 provides that where a fact is especially within the knowledge of a person, the burden of proving it lies upon that person. Demanding that the purchaser prove Section 16(2)(c) compliance violates Section 106.

7.2 The Three-Stage Burden of Proof Framework

VIII. Level Playing the Field Through Information: How Deterrence Defines the Boundaries of Bona Fide Protection

This article does not argue for unlimited or unconditional protection for all purchasers. The reading-down approach itself recognizes that ITC may be denied where the transaction is fraudulent or collusive. The key question, therefore, is twofold: what is the appropriate threshold for shifting the burden, and how should the existing statutory framework be used to create a genuinely level playing field?

The answer lies in the deterrent effect of information. Sections 149 (compliance ratings) and 159 (publication of defaulters), coupled with optimal access to BIFA-derived risk indicators, are designed not merely to inform but to deter. A market participant who, with these tools available, chooses to transact with a flagged supplier cannot claim ignorance. The deterrent effect has been triggered; the purchaser’s failure to heed it breaks the chain of bona fide protection.

Suggestive Measures: Giving Sections 149, 159, and BIFA Their Intended Effect:

The doctrinal principle that emerges is calibrated and constitutionally sound: the threshold for denying ITC should be co-extensive with the information that was reasonably available to the purchaser at the time of the transaction.

• Where the Government has failed to make available the tools (Section 149 rating, BIFA access, Section 159 publication) that would have enabled the purchaser to identify a high-risk supplier, the purchaser cannot be penalized for a risk it had no means to assess.
• Once those tools are made available, the equation changes fundamentally. A purchaser who proceeds despite a visible red flag — a low compliance rating, a defaulter listing, or a BIFA-derived risk indicator — loses the protection of bona fide status.

Once these mechanisms are operationalized, the framework becomes constitutionally defensible in both directions. A purchaser who, despite a visible red flag on the compliance rating or in the BIFA-derived risk indicator, chooses to transact with a doubtful supplier, would not be able to rebut the contention of connivance or at least constructive knowledge of the supplier’s default. In such circumstances, the denial of ITC under Section 16(2)(c) would be fully justified — the purchaser cannot claim bona fide status when the very tools that were made available to assess risk were either ignored or bypassed.

These are not calls for new legislation. They are calls for the implementation of provisions already on the statute book — Sections 149 and 159 — and for the optimal deployment of and access to technological tools like BIFA and IMS that already exist within the GST ecosystem.

X. Conclusion: Toward a Constitutionally and Doctrinally Coherent Resolution

The controversy over Section 16(2)(c) of the CGST Act is not a controversy about tax policy. It is a controversy about constitutional values: whether the State may punish a person for the wrong of another; whether it may require the impossible as a condition for exercising a statutory right; whether it may reserve for itself the tools of knowledge and then blame the ignorant for not knowing; and whether it may bypass its own specific remedies against the guilty to pursue the innocent.

The answers, drawn from the constitutional text, from a consistent line of Supreme Court and High Court authority, and from the statute’s own internal architecture, all converge:

• Section 76 of the CGST Act is the legislature’s complete answer to the mischief of supplier default. Its non-obstante clause, its ‘every person’ language (which, as the Jharkhand High Court held in R.K. Transport, extends across state boundaries), its adjudication mechanism, and its refund provision under Section 76(10) constitute a self-contained code. The Department that has this weapon and refuses to use it cannot complain about revenue loss.
• Sections 149 and 159 represent the legislature’s vision for a transparent, self-regulating GST ecosystem in which market forces — powered by publicly available compliance information — would create their own deterrent against defaulting suppliers. The Government has failed to implement these provisions for nearly nine years. It cannot take advantage of this failure to penalize purchasers for risks they had no statutory means to assess.
• BIFA represents the Department’s superior informational position — an asymmetry that is constitutionally untenable when the Department uses that information to retroactively penalize purchasers who were denied any equivalent access. The level playing field that Article 14 demands require, at minimum, that purchasers be given access to risk indicators commensurate with the information available to the Department.
• The Supreme Court’s endorsement of the reading-down approach in Arise India and Shanti Kiran establishes a constitutional principle for the entire indirect tax system, not merely for the DVAT Act. The principle — that a bona fide purchaser cannot be penalized for the supplier’s default where the purchaser had no means to prevent it — is rooted in Articles 14, 19(1)(g), and 265. GST is not immune from constitutional scrutiny.
• The Gujarat High Court’s judgment in Maruti Enterprises, while significant, is a single court’s analysis that did not consider Section 76, Section 149, Section 159, BIFA, or R.K. Transport. Its observations themselves acknowledge the hardship, direct the Government to recover from suppliers, and call for technology-driven mechanisms — which are precisely the arguments the reading-down approach seeks to vindicate.

X.1 The Path Forward:

The reading-down of Section 16(2)(c) — confirmed by the Gauhati High Court in National Plasto Moulding, the Tripura High Court in Sahil Enterprises, and the Karnataka High Court in Instakart Services — is not a judicial rewriting of the statute. It is the giving of life to the statute’s own scheme: Section 76 to pursue the wrongdoer; Sections 149 and 159 to forewarn the market; Section 16(2)(c), in its read-down form, to protect the innocent while punishing the guilty.

The Gujarat High Court in Maruti Enterprises may have upheld the provision, but it simultaneously acknowledged the hardship and directed the Government to implement tracking mechanisms and recover from suppliers. These observations, far from weakening the case for reading down, actually strengthen it by acknowledging the very problems that reading down seeks to address.

Until the Government implements Section 149, operationalizes Section 159, provides purchasers with meaningful access to BIFA insights, and first exhausts Section 76 against defaulting suppliers (as mandated by the Jharkhand High Court in R.K. Transport), the denial of ITC to bona fide purchasers under Section 16(2)(c) remains arbitrary, disproportionate, and violative of Articles 14 and 19(1)(g) of the Constitution of India.

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The views expressed herein are for academic and professional purposes and do not constitute legal advice in any specific matter.

[1] 2025-VIL-589-JHR, decided on 13.06.2025

[2] [1967] 20 STC 290 (SC)

[3] (2024) 21 Centax 182 (Gau) – 2024-VIL-804-GAU

[4] W.P.(C) 688/2022 dated 06.01.2026 – 2026-VIL-15-TRI

[5] 2026-VIL-312-KAR Neutral Citation: 2026:KHC:7981

[6] 2026-VIL-432-GUJ, decided on 01.05.2026