Section 16(2)(c) of CGST Act: Why Honest Buyers Are Bearing the Brunt of Supplier Tax Defaults

The Core Tension at the Heart of GST's ITC Framework

When the Goods and Services Tax framework was introduced in 2017, its foundational promise was elegantly simple: tax at every stage of the supply chain, offset the tax paid on inward supplies, and ensure the government collects levy only on value addition. For any ordinary trader or manufacturer, the reasonable expectation was straightforward — maintain a valid invoice, actually receive the goods or services, pay the supplier including GST, and use those inputs in the course of business. Under those circumstances, Input Tax Credit (ITC) should be safe and unassailable.

Enter Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act). This provision introduces an additional prerequisite: the tax charged on the supply must have been actually paid to the Government by the supplier. In isolation, the logic appears sound — the government wants assurance that tax has genuinely entered the treasury somewhere along the supply chain. In practice, however, this single condition has evolved into one of the most contentious and operationally damaging provisions in the entire GST architecture.

When a supplier collects GST, uploads invoice details in GSTR-1, but then fails to discharge the liability via GSTR-3B, the department finds it convenient to inform the recipient: "Section 16(2)(c) not satisfied — your ITC stands ineligible." Crucially, this denial happens even when the assessee has done everything within their capacity and legal obligation. This is the central injustice that practitioners, courts, and assessees have been grappling with since GST's inception.

Maruti Enterprise: The Gujarat High Court's Strong Endorsement of Section 16(2)(c)

Background of the Challenge

In Maruti Enterprise Through Its Authorised Partner vs Union of India & Ors (Gujarat High Court, 2026), a batch of assessees mounted a constitutional challenge to Section 16(2)(c) of the CGST Act. The petitioners presented a compelling factual matrix:

  • They possessed valid tax invoices from their suppliers
  • Goods had been physically received
  • Full consideration, including GST, had been paid through banking channels
  • The relevant invoices were duly reflected in GSTR-2B
  • Despite all of the above, certain suppliers had not remitted the collected GST to the government

The department, armed with Section 16(2)(c), denied ITC to these recipients entirely on the ground of supplier non-payment.

Arguments Advanced by the Assessees

The petitioners raised the following contentions before the Gujarat High Court:

  • ITC cannot be made contingent on a third party's compliance, over which the recipient has no control
  • It is practically impossible for any assessee to access or verify a supplier's GSTR-3B filings or electronic cash ledger
  • Such a condition violates Articles 14, 19, 21, and 300-A of the Constitution of India
  • At the very minimum, Section 16(2)(c) should be read down to restrict its operation to fraudulent or collusive transactions, not penalise bona fide purchasers

The Court's Ruling

The Gujarat High Court rejected the constitutional challenge in its entirety, arriving at the following conclusions:

  • ITC is not a vested fundamental right but a statutory concession that the legislature may grant or condition as it deems fit
  • Attaching the condition of actual tax payment by the supplier is a deliberate legislative policy choice, not an arbitrary imposition
  • Section 16(2)(c) is constitutionally valid
  • The burden of proving all ITC conditions — including Section 16(2)(c) — rests upon the recipient under Section 155 of the CGST Act
  • The argument that verification is impossible was dismissed because the statute itself provides a structured mechanism through Section 41 and Rule 37A

The Court effectively held that the condition may cause hardship in individual cases, but that alone does not render it unconstitutional. The internal statutory mechanism of Rule 37A — allowing reversal and subsequent re-availment — was cited as adequate safeguard.

This ruling represents the hardest line possible: supplier default places ITC at risk for the recipient, regardless of how genuinely and diligently the assessee conducted the transaction.

Understanding Section 41 and Rule 37A: The Statutory Safety Net That Falls Short

Two provisions now sit at the centre of every Section 16(2)(c) dispute.

Section 41 — Provisional ITC and Mandatory Reversal

Following the 2022 amendments, Section 41 of the CGST Act establishes that:

  • A registered person may avail ITC on a provisional basis, subject to prescribed conditions
  • If it is subsequently determined that any condition remains unfulfilled, such provisionally availed ITC must be reversed in the prescribed manner

Section 41 is, in essence, the mechanism by which credits are first permitted and later recalled when the underlying conditions are found wanting.