Introduction
The Goods and Services Tax (GST) framework in India is designed to ensure a seamless flow of Input Tax Credit, allowing businesses to offset taxes paid on inputs against their output liability. ITC is the backbone of GST, preventing cascading of taxes and ensuring neutrality in the tax system.
However, a major area of dispute arises when the GST registration of a supplier is retrospectively cancelled by the tax authorities. Retrospective cancellation means that the supplier’s registration is treated as invalid from an earlier date, often covering periods when supplies were already made and ITC was availed by recipients.
Purchaser made to pay the price for the default of the supplier
Many businesses find themselves in this situation, having been hit with ITC reversals because their supplier’s GSTIN was cancelled retrospectively. Even when the purchase was real and tax was genuinely paid.
Retrospective cancellation means the government cancels a supplier’s GSTIN with effect from an earlier date, usually months after a transaction occurred.
Why do they do this?
Primarily for non-filing of returns, fake invoicing, or when a supplier is involved in a tax evasion.
Now here lies the triggering point!
Purchaser made a legit purchase when their GSTIN was active. But later, the registration of the supplier was cancelled from a back date. Suddenly, purchaser’s ITC claim is flagged as invalid.
ITC and Section 16(2) of the CGST Act, 2017
Section 16(2) lays down the four conditions you must meet to claim Input Tax Credit:
a) You should be in possession of a valid tax invoice or debit note.
b) You should be in receipt of goods or services.
c) The supplier has paid the tax to the government.
d) You have filed your GST return under Section 39.
Now the problem arises w.r.t clause (c) of section 16(2).
It makes your ITC claim dependent on whether your supplier paid the tax, something you have no control over and no way to verify. That’s why this clause is under fire.
Until there’s clarity, courts are filling the gap, and they’re mostly backing buyers with proper documentation. Various High Courts across India have consistently ruled that ITC cannot be denied to a genuine buyer merely because the supplier’s GST registration was cancelled retrospectively as long as the buyer has valid invoices, proof of payment, and evidence of receipt of goods/services.
Key Judgments that have made a huge impact wherein decision has been passed in favour of the genuine buyers who are in possession of genuine records and has further stated that ITC of the genuine buyers can’t be taken away due to supplier’s retrospective cancellation of GST Registration.
v. M/s Kesarwani Traders Versus State of Up And 3 Others5 2025 (8) TMI 1132 – Allahabad High Court
vi. Shyamalmay Paul Versus Assistant Commissioner SGST, Siliguri Charge, Siliguri & Ors6. 2025 (11) TMI 428 – Calcutta High Court
Several High Courts have thoroughly examined the issue and rendered their decisions in the aforementioned court rulings, emphasizing:
√ The sole ground on which the ITC claimed has been denied to the petitioner/ purchaser is that the supplier’s GST registration has been cancelled with retrospective effect. However, there is no material on record indicating that either the Adjudicating Authority or the Appellate Authority has considered whether the transaction in question was genuine and straightaway notice under Section 16(2) of the CGST Act has been issued.
√ The petitioner/ purchaser with due diligence verified the genuineness and identity of the supplier and name of the supplier as registered taxable person was available at the Government Portal showing its registration as valid and existing at the time of transaction – Admittedly at the time of transaction, the name of the supplier as registered taxable person was already available with the Government record and the purchaser has paid the amount of purchased articles as well as tax on the same through bank and not in cash.
√ The petitioner/ purchaser stated that they have limitation on their part in ascertaining the validity and genuineness of the suppliers in question and they have done whatever possible in this regard and more so, when the names of the suppliers as a registered taxable person were already available with the Government record and in Government portal at the relevant period of transaction petitioners could not be faulted if they appeared to be fake later on.
√ Petitioner/ purchaser submitted that they have paid the amount of purchases in question as well as tax on the same not in cash but through banking channel and petitioner/ purchaser are helpless if at some point of time after the transactions were over, if the respondent/ GST Officials finds on enquiries that the aforesaid suppliers were fake and bogus. Therefore, this cannot be the basis to penalise the petitioner/ purchaser unless the respondents/ GST Officials establish with concrete materials that the transactions in question were the outcome of any collusion between the petitioner/ purchaser and the supplier in question.
√ Furthermore, Petitioner/ purchaser submitted that all the purchases in question invoices-wise were available on the GST portal in form GSTR-2A which are matters of record.
√ It is a matter of common knowledge that after filing of GSTR-01, an auto populated window would be open for filling the GSTR-3B for payment of tax and GSTR-2A can be viewed by the purchaser of the goods in question.
√ The Hon’ble High Courts is of the view that before taking any action in the matter, considering the genuineness of the transaction, the same could have been determined only after examining all the relevant documents, tax invoice cum challan, debit note, e-Way Bill, transportation bill and statement of bank account. Respondent/ GST authorities only took into consideration the cancellation of registration of the supplier with retrospective effect and rejected the claim of the petitioner without considering the documents relied by the petitioner.
√ The Hon’ble High Court decided in favour of the petitioner/ purchaser and directed the respondent/ GST Authorities to consider the grievance of the petitioner afresh by taking into consideration of the documents which the petitioner/ purchaser intends to rely in support of his claim.
What buyers can do to stay protected?
From the aforesaid decisions of various High Courts, it is most important/crucial to have proof such as:
√ Verify supplier’s GSTIN on gst.gov.in before you pay.
√ Keep tax invoices, e-way bills, proof of delivery, and work orders.
√ Use banking channels only: NEFT, RTGS, or IMPS with traceable UTRs.
√ Reconcile GSTR-2A vs books
√ Respond to departmental correspondences. Always reply with documents, judicial precedents and request for a personal hearing.
Conclusion
As discussed above, it is understood that when the purchaser has maintained accurate records complied with all necessary provisions under GST Act, 2017, then the purchaser is rightly eligible to avail ITC and in no manner the same can be denied on the ground of supplier’s GST Registration being cancelled retrospectively. Here’s how to defend what you are entitled to rightfully yours:
> Always respond promptly providing specific details along with proper and relevant documentation to the departmental notices concerning ITC disputes.
> If the issue relating to section 16(2)(c) gets escalated, you can approach the Jurisdictional High Court and get relief as long as you are in possession of all the supporting documents relating to the transaction. Various High Courts have decided in favour of the taxpayers/purchasers, only if the transaction was genuine and held that ITC cannot be denied due to supplier’s GSTIN was cancelled later.
Impact under Income Tax Act, 1961.
An unintended and adverse consequence of the retrospective cancellation of GST registrations is that the Income-tax Department has begun to treat purchases made from such suppliers as “bogus purchases”.
Owing to the cancellation of registration with retrospective effect, the suppliers are considered, in law, to have been unregistered during the relevant period. On this basis, Income-tax Authorities have initiated reassessment proceedings and have sought to disallow the expenditure incurred on such purchases, alleging that the transactions are non-genuine. As a result of such disallowances, substantial additions are being made to the income of taxpayer, as a result of which artificially inflated high income is determined which in turn leads to issuance of large and unwarranted tax demands. Thus, the tax payer is not only burdened with huge demands but also substantial interests under Sections 234 B & C and also penalty proceedings under Section 270A (9) for under reporting of income in consequence to misreporting which entails imposition of 200% of the tax as penalty The huge tax, interest and penalty imposes unjust cash flow strain on the taxpayer. Further taxpayer is invariably tied up in prolonged litigation with the Department for no fault of his and only due to that fact that he could not anticipate that the GST department will retrospectively cancel the seller’s registration years later.
Notes:-
1 2023 (6) TMI 533 – Calcutta High Court
2 2021 (12) TMI 834- Calcutta High Court
3 2025 (6) TMI 586- Himachal Pradesh High Court
4 2025 (3) TMI 1313- Allahabad High Court
5 2025 (8) TMI 1132 – Allahabad High Court
6 2025 (11) TMI 428 – Calcutta High Court
7 2022 (5) TMI 786 – Calcutta High Court
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