Gujarat High Court clarifies ITC exposure when suppliers default under GST
The controversy around denial of Input Tax Credit (ITC) because a supplier fails to deposit GST continues to generate intense litigation. The Gujarat High Court’s decision in Maruti Enterprise vs Union of India & Ors. (order dated 01.05.2026) offers crucial judicial guidance on how such disputes should be approached, particularly where the purchaser is a bona fide assessee.
This analysis distils the core reasoning of the Court, explains its reading of Section 16(2)(c) of the CGST Act, 2017, and highlights the practical implications for assessees facing ITC disputes due to supplier non‑compliance.
Statutory background: conditions and recovery framework
Before examining the decision, it is essential to revisit the relevant statutory provisions that the Court considered.
Key provisions under the CGST Act, 2017
Section 16(2)(c)– linkage of ITC to tax payment to Government- ITC on a supply is available to the recipient only if the tax charged on such supply has been actually paid to the Government by the supplier.
- This condition lies at the heart of disputes where the supplier collects GST but does not deposit it.
Section 41(2)– mechanism for ITC reversal and re‑availment- This provision contemplates situations where ITC taken earlier may need to be reversed, with a corresponding possibility of re‑availing the credit once the underlying tax is ultimately paid.
- It represents a built‑in corrective process, instead of a one‑time, permanent denial.
Sections 73 & 74– recovery proceedings against defaulting supplier- These provisions empower the Department to initiate recovery from the supplier where tax has not been paid or has been short‑paid, with or without elements of fraud, willful misstatement, or suppression.
Section 155– burden of proof- When an assessee claims that ITC is lawfully available, the burden of establishing eligibility lies on that assessee.
- This shifts the onus to the recipient to produce documents and demonstrate the genuineness of the transaction and compliance with conditions.
Core controversy in Maruti Enterprise
The central legal question that came up before the Gujarat High Court in Maruti Enterprise vs Union of India & Ors. was:
Can ITC available to a purchasing assessee be denied purely because the supplier has failed to remit GST to the Government, based on
Section 16(2)(c)of the CGST Act, 2017, even where the recipient has otherwise fulfilled all visible conditions?
This question has larger implications for commercial certainty under GST, because the purchasing assessee has no direct control over whether the supplier actually deposits the collected tax.
Court’s prima facie stance on validity of Section 16(2)(c)
No reading down and no constitutional invalidation
The Gujarat High Court, while examining the challenge, expressed a prima facie view that:
- It was not inclined to read down
Section 16(2)(c); and - Consequently, the question of striking down the provision as unconstitutional did not arise at this stage.
In other words, the statutory requirement that tax must have been actually paid to the Government in order for ITC to be finally admissible remains legally valid and operational.
Assessees in Gujarat, therefore, cannot argue that Section 16(2)(c) itself is unconstitutional, but they can still contest specific applications of the provision that are arbitrary or contrary to broader legal principles highlighted by the Court.
Detailed observations of the Court (Paras 87–88)
The Gujarat High Court’s discussion in paragraphs 87–88 goes beyond a simple validation of the law and provides important safeguards for bona fide assessees.
1. Recovery must first be targeted at the defaulting supplier
The Court noted that the GST framework already equips the Department with adequate tools to proceed against non‑compliant suppliers, particularly through: