Introduction
The seamless flow of Input Tax Credit (ITC) is one of the defining features of the Goods and Services Tax (GST) regime. By allowing businesses to claim credit for taxes paid on inward supplies, the GST framework seeks to eliminate the cascading effect of taxation and ensure that tax is levied only on value addition. This objective, however, has been repeatedly tested by Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act), which makes ITC available only if the tax charged on the supply has actually been paid to the Government.
The provision has generated considerable controversy where a bona fide purchaser has paid the entire invoice value, including GST, received the goods or services, and fulfilled every statutory obligation within its control, but the supplier subsequently fails to remit the tax to the Government. In such cases, tax authorities have frequently denied or reversed the purchaser's ITC, raising an important question: should an honest recipient suffer for the supplier's default? The recent decisions of the Tripura High Court and the Gujarat High Court have provided conflicting answers, making the issue one of the most significant unresolved questions under GST law.
The Statutory Framework
Section 16 of the CGST Act prescribes the conditions for availing ITC. A registered person is entitled to credit only if it possesses a valid tax invoice, has received the goods or services, the supplier has furnished the invoice details, the credit is not restricted under the Act, the tax has actually been paid to the Government, and the recipient has furnished the prescribed return.
The statutory framework has evolved with the introduction of Section 16(2)(aa), implementation of Section 38, and the GSTR-2B mechanism, enabling recipients to verify whether suppliers have uploaded invoices. However, the GST system still does not provide any mechanism for recipients to verify whether the supplier has ultimately discharged the tax liability through GSTR-3B. Consequently, while a purchaser can verify invoice reporting, it cannot ascertain whether the tax collected has actually been deposited with the Government. This practical limitation lies at the centre of the constitutional challenge to Section 16(2)(c).
The issue assumes greater significance when Section 16(2)(c) is read together with Sections 41 and 155 of the CGST Act. While Section 41 governs the availment and reversal of self-assessed ITC, Section 155 places the burden of proving eligibility for credit upon the claimant. The interpretation of these provisions has divided the judiciary.
The Practical Challenge for Bona Fide Purchasers
From a commercial perspective, the purchaser has no statutory authority or practical means to monitor the supplier's subsequent compliance with GST obligations. Once payment is made against a valid tax invoice and the goods or services are received, the purchaser cannot compel the supplier to file returns or deposit the tax collected. Nor can the purchaser anticipate future defaults by the supplier.
This practical impossibility forms the foundation of the challenge against Section 16(2)(c). Taxpayers contend that the law should not require compliance with a condition that is entirely beyond the recipient's control. Penalising an honest purchaser for the independent default of the supplier effectively transfers the supplier's statutory liability to a third party who has already discharged its own obligations under the law.
Tripura High Court: A Purposive Interpretation
In Sahil Enterprises v. Union of India dated 06-01-2026, the Tripura High Court recognised this practical difficulty and adopted a purposive interpretation of Section 16(2)(c). The Court observed that the GST framework does not provide recipients with any mechanism to verify whether the supplier has actually deposited the tax with the Government. Expecting purchasers to ensure such compliance would therefore impose an impossible obligation.
The Court further held that denial of ITC solely because of the supplier's subsequent default would amount to penalising one taxpayer for the misconduct of another, even though the purchaser had acted bona fide and exercised reasonable diligence. Such an interpretation, according to the Court, would offend the constitutional guarantee against arbitrariness under Article 14.
Rather than declaring Section 16(2)(c) unconstitutional, the Court invoked the doctrine of reading down. It held that the provision should be interpreted in a manner that preserves its constitutional validity by restricting its application to cases involving collusion, fraud or lack of due diligence. Where a recipient has complied with all statutory requirements within its control and the transaction is genuine, ITC should ordinarily not be denied merely because the supplier subsequently defaults. The Court also observed that the primary remedy of the tax department should lie against the defaulting supplier who has failed to deposit the tax collected.
Gujarat High Court: A Literal Interpretation
A different approach was adopted by the Gujarat High Court in Maruti Enterprise v. Union of India dated 01-05-2026. The Court upheld the constitutional validity of Section 16(2)(c) without reading it down, holding that actual payment of tax to the Government is an essential statutory condition for availing ITC.
According to the Court, Section 16(2)(c) cannot be interpreted in isolation but must be read harmoniously with Sections 41 and 155 of the CGST Act. These provisions collectively indicate the legislative intent that ITC is available only when the corresponding tax has actually reached the Government treasury. The Court further observed that judicial dilution of this requirement would amount to rewriting the statute, which falls exclusively within the legislative domain.
The Gujarat High Court also distinguished earlier VAT decisions, particularly On Quest Merchandising India Pvt. Ltd. dated 10-01-2018, on the ground that the statutory framework under the CGST Act is materially different and contains provisions that were absent under the Delhi VAT Act.
Understanding the Scope of Ecom Gill Coffee Trading
The Revenue has increasingly relied upon the Supreme Court's decision in State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd. dated 13-03-2023 to justify denial of ITC. However, the scope of that decision requires careful appreciation.
The dispute in Ecom Gill arose under the Karnataka Value Added Tax Act and primarily concerned the burden of proving the genuineness of transactions. The Supreme Court held that production of invoices, banking records and accounting entries alone is insufficient where the genuineness of purchases is disputed. The assessing authority is entitled to examine surrounding circumstances before allowing ITC.
The judgment, however, does not lay down a universal principle that every bona fide purchaser must lose ITC whenever a supplier defaults in depositing tax. It principally deals with cases involving doubtful or non-genuine transactions. This distinction explains why the Tripura High Court considered the decision distinguishable, whereas the Gujarat High Court viewed it as reinforcing the statutory requirement contained in Section 16(2)(c).
Balancing Revenue Protection and Taxpayer Rights
The conflicting decisions reflect the continuing tension between two important objectives of the GST regime. On one hand is the need to protect Government revenue by ensuring that ITC corresponds to tax actually deposited into the exchequer. On the other is the constitutional principle that an honest taxpayer should not be penalised for circumstances beyond its knowledge or control.
The Tripura High Court attempts to balance these competing considerations by protecting bona fide purchasers while preserving the power of the tax authorities to proceed against fraudulent recipients and defaulting suppliers. The Gujarat High Court, however, places greater emphasis on the statutory language, leaving any relaxation of the condition to legislative intervention rather than judicial interpretation.
Conclusion
The controversy surrounding Section 16(2)(c) represents one of the most significant unresolved issues under the GST regime. The Tripura High Court has adopted a purposive approach that protects bona fide purchasers who have acted with due diligence, while the Gujarat High Court has preferred a strict interpretation requiring actual payment of tax to the Government as a mandatory condition for ITC. Both decisions seek to uphold the statutory framework but differ in their approach to balancing revenue interests with taxpayer rights.
Until the Supreme Court authoritatively settles the issue, businesses should continue to strengthen supplier due diligence by verifying GST registration, matching invoices with GSTR-2B, maintaining complete documentary evidence of receipt of goods or services, preserving payment records and periodically reviewing supplier compliance. While these measures cannot eliminate the risk of litigation, they significantly improve the recipient's ability to establish the genuineness of transactions and demonstrate good faith. The eventual resolution of this controversy will play a crucial role in determining whether the GST system continues to uphold its foundational principle of seamless flow of credit while ensuring effective protection of Government revenue.
