GST ITC Disallowance Based Only on Supplier NGSTP Tag: Legal Position & Practical Response

1. Context: When Portal Data Becomes the Only “Evidence”

Field formations are increasingly issuing notices demanding reversal of entire input tax credit (ITC) availed from particular suppliers merely because:

  • the supplier has been flagged as NGSTP, or
  • the supplier’s registration has been cancelled, often with retrospective effect, or
  • a report brands the supplier as non-genuine or bogus.

The standard pattern is:

  1. Officers obtain a backend report identifying certain “risky” suppliers.
  2. They download the recipient’s GSTR-2A/2B, GSTR-1, GSTR-3B and e-way bill data.
  3. Those figures are mechanically pasted into FORM GST DRC-01A or a show-cause notice.
  4. A blanket proposal is made to reverse ITC, often invoking Section 74 or alleging fraud under Section 74A(5)(ii).

This approach overlooks two fundamental aspects:

  • The same GST portal data is generated from, and reflects, disclosures made by both supplier and recipient. Calling this “suppression” is self-contradictory.
  • A serious allegation of fraud, wilful misstatement or suppression cannot be sustained in law without assessee-specific evidentiary support.

From FY 2023-24 backwards, fraud-based proceedings must be rooted in Section 74. From FY 2024-25 onwards, tax and ITC determination is guided by Section 74A, where the allegation of fraud primarily affects the penalty quantum under Section 74A(5)(ii) and does not operate as a shortcut for investigation.

2. Statutory Framework: Section 74 vs Section 74A

2.1 Applicability Across Time Periods

  • Up to FY 2023-24
    Disputes involving non-payment, short payment, erroneous refund, or wrongful ITC availment/utilisation by reason of fraud, wilful misstatement or suppression of facts fall under Section 74.

  • From FY 2024-25 onwards
    All determinations of tax/ITC, whether involving fraud or not, fall under Section 74A. The provision, however, distinguishes between:

    • Ordinary cases (no allegation of fraud, wilful misstatement or suppression), and
    • Cases where fraud, wilful misstatement or suppression to evade tax is alleged.

2.2 Penalty Structure Under Section 74A

Within Section 74A, the consequences differ based on the nature of default:

  • Any reason other than fraud, wilful misstatement or suppression to evade tax
    → Penalty is 10% of tax or ₹10,000, whichever is higher.

  • Fraud, wilful misstatement or suppression of facts to evade tax
    → Penalty is equal to the tax determined.

Further, Section 74A(9) deals with conclusion of proceedings after a notice where fraud or equivalent misconduct has been alleged:

  • Section 74A(9)(ii) – Payment within 60 days of notice: tax + interest + 25% of penalty.
  • Section 74A(9)(iii) – Payment within 60 days of order: tax + interest + 50% of penalty.

The legal takeaway: labeling a case as “fraud” is not a casual choice; it triggers a highly adverse penalty regime. Allegations must therefore be backed by clear, cogent facts relating to the assessee, not merely by a status change of the supplier on the portal.

2.3 Meaning of “Suppression”

The statute defines “suppression” to mean:

  • Non-declaration of facts or information required to be declared in any return, statement, report or other document under the Acts, or
  • Failure to furnish information specifically called for in writing by the proper officer.

Where the assessee has:

  • Reflected ITC in GSTR-3B,
  • Seen invoices in GSTR-2A/2B,
  • Dealt with suppliers declared as registered on the portal, and
  • Had e-way bills, books of account and bank payments available for verification,

it becomes necessary for the officer to clearly identify:

Which fact did this assessee fail to declare, and how was that non-declaration aimed at evading tax?

Without such specificity, the invocation of “suppression” is on weak legal footing.

3. Portal Numbers Alone Cannot Create “Fraud”

3.1 What Is Not Fraud

Simply put, fraud is not:

  • A difference between GSTR-2A/2B and GSTR-3B;
  • A supplier being marked NGSTP or cancelled;
  • A system-generated risk report;
  • An Excel sheet print-out from the portal;
  • An officer’s suspicion unsupported by transaction-specific inquiry.

3.2 What Evidence Is Typically Required for a Fraud Allegation Against Recipient

To legitimately allege fraud against a recipient, authorities need concrete indicators such as:

  • Proof that no actual supply of goods or services took place.
  • Material showing that transport documents or e-way bills are fabricated.
  • Evidence that bank payments are circular, accommodation entries, or returned in cash.
  • Links indicating common control between supplier and recipient (e.g., same premises, IP, phone, email, signatory or beneficial owner).
  • Statements or admissions implicating the recipient, coupled with an opportunity for cross-examination if these are relied upon.
  • Specific instances showing the assessee’s knowledge or participation in invoice trading or sham ITC chains.