High Court Upholds Section 16(2)(c): No ITC If Supplier Fails to Deposit Tax

In a batch of petitions led by Maruti Enterprise, multiple registered dealers challenged the constitutional validity of Section 16(2)(c) of the CGST Act, 2017 before the Gujarat High Court. The petitioners argued that denial of Input Tax Credit (ITC) to a genuine purchaser, merely because the supplier failed to deposit the collected tax, was arbitrary and violative of Articles 14, 19(1)(g), and 300A of the Constitution. They emphasised that buyers have no control over the supplier’s compliance or access to their return filings, making the condition practically impossible to fulfil.

Issue Raised: Whether Section 16(2)(c) of the CGST Act, which makes ITC contingent upon actual tax payment by the supplier, is unconstitutional or liable to be read down to safeguard bona fide purchasers.

HC’s Ruling: The Hon’ble High Court upheld the constitutional validity of Section 16(2)(c) and dismissed the petitions. The Court held that ITC is not an absolute or vested right but a statutory concession that can be availed only upon fulfilment of prescribed conditions. It observed that under the GST framework, which is a destination-based tax system, credit cannot be granted where the corresponding tax has not reached the government treasury.

The Court also noted that the law does not impose a permanent burden on purchasers, as mechanisms under Section 41(2) and Rule 37A allow reversal and re-availment of ITC once the supplier discharges the tax liability. Rejecting the plea to “read down” the provision, the Court distinguished earlier VAT-era rulings and clarified that the GST regime operates on a different statutory scheme. Therefore, denial of ITC in such cases was held to be legally valid. To mitigate risks, the court suggested that purchasers can protect themselves through indemnity clauses in private contracts with their suppliers.

To Read Full Judgment, Download PDF Given Below