Gujarat High Court Confirms ITC Denial for Supplier Non‑Payment: What Assessees Must Do Now

The Gujarat High Court in Maruti Enterprise vs. Union of India & Ors. has delivered a significant ruling that directly affects how assessees manage Input Tax Credit (ITC) under the GST regime. In this decision dated May 1, 2026, the Court has upheld the constitutional validity of Section 16(2)(c) of the CGST Act, affirming that ITC can be rejected where the supplier fails to remit the collected tax to the Government.

This judgment reinforces the principle that ITC is not an automatic or absolute right but a conditional concession that can be withdrawn if statutory requirements are not fulfilled. For businesses, this dramatically heightens the need for strong vendor due diligence, systematic reconciliation of returns, and robust contractual protections.

Background of the Dispute

In Maruti Enterprise vs. Union of India & Ors., the assessee had claimed ITC on the strength of valid tax invoices and other primary documentation. However, it was later found that the suppliers had not deposited the corresponding GST with the Government.

The department invoked Section 16(2)(c) of the CGST Act to deny ITC to the assessee on the ground that one of the pre‑conditions for availing ITC — that tax charged in respect of the supply has actually been paid to the Government — was not met.

The assessee challenged the constitutional validity of Section 16(2)(c), arguing that it was unreasonable and imposed an impossible burden on the recipient to ensure supplier compliance, something over which the recipient has no direct control.

Core Holding of the Gujarat High Court

1. Section 16(2)(c) Held Constitutionally Valid

The Gujarat High Court concluded that Section 16(2)(c) of the CGST Act is constitutionally sound. The Court held that:

  • ITC is not a vested right of the assessee.
  • ITC is in the nature of a concession or benefit extended by the statute, which can be made subject to conditions.
  • The Legislature is competent to prescribe conditions, including the condition that tax charged by the supplier must actually be deposited into the Government account.

In other words, the Court accepted that Parliament can lawfully make the enjoyment of ITC contingent on the supplier fulfilling their own tax obligations.

2. ITC Can Be Denied When Supplier Fails to Pay Tax

On the substantive issue, the Court ruled that where the supplier collects GST but does not remit it to the Government:

  • The condition in Section 16(2)(c) remains unsatisfied.
  • In such a situation, the assessee’s ITC claim may be legally disallowed, even if the assessee has properly recorded the transaction, paid the invoice value plus tax to the supplier, and holds supporting documentation.

This aligns the beneficiary of ITC with the compliance status of the supplier, thereby embedding a risk of ITC loss attributable to third‑party default.

3. ITC as a Conditional Benefit, Not an Indefeasible Right

The Court reiterated that: