Author: Ashwarya Sharma, Advocate, Co-Founder & Legal Head, RB Law Corp
Date: 08/05/2026
Introduction: The Never-Ending ITC Controversy
Few aspects of the GST regime have generated as much litigation and commercial uncertainty as Input Tax Credit (“ITC”). Designed as the backbone of GST and the mechanism intended to eliminate cascading of taxes, ITC has instead become one of the most disputed areas in indirect taxation.
Among the many controversies surrounding ITC, perhaps the most contentious is the recurring situation where a bona fide purchasing dealer is denied credit solely because the supplier fails to deposit tax with the Government.
The dispute lies at the intersection of statutory compliance and commercial reality. On one side stands Section 16(2)(c) of the CGST Act, which conditions availment of ITC upon actual payment of tax by the supplier. On the other lies the practical limitation that recipients often have no real mechanism to verify whether suppliers have discharged their tax liability.
The Gujarat High Court’s decision in Maruti Enterprise v. Union of India & Ors. marks another important development in this continuing constitutional and commercial debate.
Factual Background: Challenge to Section 16(2)(c)
The writ petitions before the Gujarat High Court involved a constitutional challenge to Section 16(2)(c) of the CGST Act.
The petitioners were purchasing dealers who had:
- received goods,
- possessed valid tax invoices, and
- reflected transactions in statutory returns.
Despite satisfying these requirements, ITC was denied because the suppliers allegedly failed to discharge output tax liability through Form GSTR-3B.
The petitioners therefore challenged the constitutional validity of Section 16(2)(c) on grounds including:
- arbitrariness,
- impossibility of compliance,
- hostile discrimination, and
- violation of Articles 14 and 19(1)(g) of the Constitution.
Petitioners’ Arguments: Why Denial of ITC Was Challenged
1. Impossibility of Verifying Supplier Compliance
The petitioners argued that a recipient has no statutory or technological mechanism to verify whether the supplier has actually deposited tax with the Government.
While recipients may verify:
- GST registration status, and
- invoice reflection in GSTR-2A/2B,
they cannot access the supplier’s GSTR-3B or tax payment records.
Consequently, Section 16(2)(c) effectively requires purchasers to perform an impossible task, offending the doctrine of Lex Non Cogit Ad Impossibilia — the law does not compel impossibilities.
2. Bona Fide Purchasers Cannot Be Punished
The petitioners emphasized that the GST framework already contains safeguards ensuring genuineness of transactions, including:
- possession of tax invoices,
- receipt of goods/services, and
- reflection of invoices in GSTR-2B.
Once these conditions are fulfilled, denial of ITC due to supplier default unfairly penalizes honest purchasers for events entirely beyond their control.
Reliance was placed upon several landmark judgments including:
- On Quest Merchandising India (P.) Ltd.,
- Arise India Ltd., and
- Shanti Kiran India (P.) Ltd.
to argue that bona fide purchasers cannot be treated at par with collusive or fraudulent dealers.
3. Denial of ITC Results in Cascading of Taxes
Another significant argument advanced was that denial of ITC effectively results in double taxation.
The petitioners contended that GST had already been collected from the purchaser by the supplier. Denying ITC thereafter taxes the same transaction again, defeating the core objective of GST — elimination of cascading taxes.
4. ITC as a Vested Right
The petitioners also argued that once ITC is validly reflected in GSTR-2B and availed on genuine transactions, it becomes a vested right.
Subsequent denial due to supplier default, according to the petitioners, is arbitrary and confiscatory.
State’s Defence: Revenue Protection and Fiscal Integrity
1. ITC Is a Conditional Statutory Benefit
The State strongly relied upon Section 155 of the CGST Act, which places the burden of proving admissibility of ITC upon the claimant.
According to the State:
- ITC is not an unconditional right,
- it is merely a statutory concession, and
- fulfilment of prescribed conditions is mandatory.
2. Importance of Fiscal Integrity in GST
The State emphasized the integrated architecture of GST, particularly the inter-State flow of credits under the IGST mechanism.
It argued that allowing ITC merely on invoice basis, despite non-payment by suppliers, would disrupt fiscal transfers between States and undermine the integrity of the GST framework.
3. Section 16(2)(c) Must Be Read Along With Section 41
The respondents argued that Section 16(2)(c) cannot be interpreted in isolation.
Under Section 41(2) and Rule 37A:
- ITC may be temporarily reversed if the supplier fails to pay tax, but
- the recipient can re-avail such credit once tax is subsequently deposited.
Thus, according to the State, the framework merely postpones ITC rather than permanently extinguishing it.
4. VAT Judgments Cannot Be Automatically Applied to GST
The State further argued that precedents under the earlier VAT regime cannot be mechanically imported into GST jurisprudence because the GST framework operates through a far more integrated fiscal architecture.
Key Issue Before the High Court
The principal question before the Gujarat High Court was:
Whether Section 16(2)(c) of the CGST Act, which conditions ITC upon payment of tax by the supplier, is unconstitutional, arbitrary, or liable to be read down.
Findings of the Gujarat High Court
1. GST Framework Is Built Around “Taxes Paid”
The High Court began by examining the Statement of Objects and Reasons of the GST legislation.
The Court observed that the ITC mechanism itself is premised upon taxes actually reaching the Government treasury. Therefore, payment of tax by the supplier forms a foundational component of the GST framework.
2. GST Differs Fundamentally From VAT
One of the most significant aspects of the judgment is the Court’s distinction between VAT jurisprudence and GST architecture.
The Court held that GST involves inter-State fiscal adjustments and revenue sharing mechanisms absent under the VAT regime. Consequently, supplier default under GST carries far wider fiscal implications.
3. Section 16(2)(c) Must Be Read Harmoniously With Section 41
The Court repeatedly emphasized that Section 16(2)(c) cannot be read independently.
When interpreted alongside Section 41 and Rule 37A, the framework allows:
- temporary reversal of ITC, and
- subsequent re-availment once supplier compliance is restored.
According to the Court, this creates a balanced mechanism protecting both revenue and genuine purchasers.
4. ITC Is Not an Absolute Right
Rejecting the argument of vested rights, the Court reiterated that ITC is a statutory entitlement subject to prescribed conditions.
Unless tax collected by the supplier is actually remitted to the Government, the recipient cannot claim ITC as an indefeasible right.
5. Doctrine of Impossibility Rejected
Although the Court acknowledged practical hardships faced by purchasers, it nevertheless held that commercial difficulty alone cannot invalidate a statutory provision.
The Court suggested that businesses may protect themselves through:
- contractual safeguards,
- indemnity clauses, and
- vendor due diligence mechanisms.
6. Reading Down of Section 16(2)(c) Declined
Ultimately, the Court refused to read down Section 16(2)(c), holding that the provision forms part of a coherent statutory scheme intended to preserve the integrity of the GST credit chain.
Significant Observations Made by the Court
While upholding constitutional validity, the Court made important observations acknowledging the genuine difficulties faced by businesses.
The Court emphasized the need for:
- technology-driven invoice verification systems,
- stronger recovery mechanisms against defaulting suppliers, and
- reforms reducing the disproportionate burden currently placed upon recipients.
These observations are likely to assume considerable importance in future litigation and policy discussions.
Practical Challenges Emerging From the Judgment
The ruling exposes the significant commercial burden now imposed upon businesses under GST.
Purchasers may increasingly be forced to adopt:
- extensive vendor audits,
- indemnity structures,
- escrow arrangements, and
- continuous compliance monitoring mechanisms.
For large businesses dealing with thousands of transactions across multiple States, such obligations may become commercially onerous. Smaller businesses, in particular, may lack the bargaining power or technological capacity to implement these safeguards effectively.
Conclusion: The ITC Debate Is Far From Over
The Gujarat High Court’s decision in Maruti Enterprise marks another major chapter in the evolving jurisprudence surrounding supplier default and denial of ITC under GST.
While the Court upheld the constitutional validity of Section 16(2)(c), the judgment simultaneously highlights the continuing tension between:
- protection of Government revenue, and
- fairness towards bona fide taxpayers.
Importantly, the Court itself acknowledged the practical difficulties created by the present framework and implicitly recognized the urgent need for technological and legislative reforms.
Given the conflicting judicial opinions emerging across different High Courts and the enormous commercial implications involved, the controversy surrounding Section 16(2)(c) now appears increasingly destined for authoritative resolution by the Supreme Court of India.
Until then, businesses will likely continue operating in one of the most uncertain and heavily litigated areas of GST law, balancing compliance obligations against commercial practicality in an evolving indirect tax regime.
📎 Attached PDF for detailed reading 👉
📎 Full Published Version: https://vilgst.com/showiframe?V1Zaa1VsQlJQVDA9=TVRnMk9BPT0=&page=articles
(The author is a practicing advocate, Co-Founder and Legal Head of RB LawCorp.
He specializes in GST law. Suggestions or queries can be directed to
ashsharma@rblawcorp.in. The views expressed in this article are strictly
personal.)
