By CS Adv. Abhishek Goyal
For most Indian businesses, Input Tax Credit is not a tax benefit—it is working capital.
Yet, under GST, Section 16(2)(c) has become the single biggest trigger for ITC denial disputes across India.
“GST was designed as a trust-based system. Section 16(2)(c), as it is being enforced today, operates on suspicion—not trust.”
The Core Problem: Buyer Punished for Seller’s Default
Section 16(2)(c) makes ITC conditional upon actual payment of tax to the Government by the supplier. On paper, this sounds logical. On the ground, it is commercially unworkable.
“A buyer can verify registration, invoice, and receipt of goods—but cannot sit inside the supplier’s GST cash ledger. The law expects the impossible.”
In litigation matters across India, businesses are facing:
- ITC reversals years after transactions
- Notices without any allegation of collusion or fraud
- Demands even where tax was already paid to the supplier
Why This Provision Is Being Challenged in Courts
From a litigation standpoint, Section 16(2)(c) is being tested on three core legal principles:
1️⃣ Impossibility of Performance
A legal condition that cannot be complied with cannot be enforced.
“No statute can compel a person to do what is beyond his control. Courts have consistently frowned upon such legislative overreach.”
2️⃣ Misplaced Burden of Tax Recovery
GST law empowers authorities to recover tax from the defaulting supplier, yet enforcement is being redirected to the buyer.
“Recovery convenience cannot replace legal responsibility. The department cannot shift its recovery burden onto compliant taxpayers.”
3️⃣ Break in the Credit Chain
GST is a destination-based consumption tax. Breaking ITC for a genuine buyer defeats the architecture of GST itself.
Judicial Trend: Protection for Bona Fide Buyers
Across High Courts, a consistent judicial theme is emerging:
- ITC cannot be denied mechanically
- Bona fide buyers deserve protection
- Fraud must be specifically alleged and proven
- Mere supplier default is not enough
“Courts are drawing a clear line: GST enforcement cannot be revenue-centric at the cost of economic fairness.”
Economic Impact No One Is Talking About
Section 16(2)(c) has quietly created:
- Working capital stress for MSMEs
- Vendor paranoia across supply chains
- Artificial inflation of compliance costs
- Litigation-driven GST administration
“This provision has converted businesses into tax investigators. That was never the intent of GST.”
What Businesses Must Do—Until Clarity Emerges
While litigation continues, businesses must adopt defensive compliance, even though the law itself is under challenge:
- Strong vendor due diligence
- Regular GSTR-2B reconciliation
- Contractual tax-default safeguards
- Documentation to establish bona fide conduct
“Compliance today is not about prevention—it is about litigation preparedness.”
The Way Forward
For GST to regain credibility as a pro-business reform:
- Section 16(2)(c) must be interpreted reasonably, not punitively
- Bona fide buyers must not be punished without proof of collusion
- Tax recovery must remain where it belongs—with the defaulter
“If GST is to support growth, it must stop criminalising commercial trust.”
Final Word
Section 16(2)(c) is no longer a technical clause—it is a litigation flashpoint shaping the future of ITC jurisprudence in India.
“The real test of GST is not how much tax it collects—but how fairly it treats honest businesses.”
