Supreme Court Confirms Constitutional Validity of Section 16(2)(c) of CGST Act: ITC Linked to Supplier’s Tax Payment

The Supreme Court in Bhandari Scrap Traders Vs Union of India & Ors. (Supreme Court of India) has conclusively upheld the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017. This ruling effectively confirms that an assessee’s entitlement to Input Tax Credit (ITC) under the GST law is conditional upon the supplier having actually remitted the GST to the Government.

This decision came in the context of challenges raised before the Gujarat High Court and subsequent Special Leave Petitions filed before the Supreme Court. The core issue was whether Section 16(2)(c) — which ties ITC to the supplier’s payment of tax — is arbitrary, unconstitutional, or requires reading down to protect bona fide assessees.

Background: Writ Petitions Before Gujarat High Court

Challenge to Section 16(2)(c)

A series of writ petitions were filed before the Gujarat High Court questioning the constitutional soundness of Section 16(2)(c) of the CGST Act. The assessees argued that this provision, which makes ITC available only if the tax charged by the supplier has actually been paid to the Government, is:

  • Arbitrary and unreasonable
  • Beyond the powers conferred by the Constitution (ultra vires)
  • In conflict with Articles 14, 19(1)(g), 265, and 300A of the Constitution of India

The assessees also presented an alternative plea: even if Section 16(2)(c) is upheld, it should be interpreted (read down) to apply only in cases where the transactions are:

  • Fraudulent
  • Collusive
  • Carried out with connivance between buyer and supplier

Their case was that genuineness of purchases and good faith should shield a bona fide recipient of supplies from denial of ITC merely because the supplier fails to pay the tax.

Grievance of the Assessees

The essential grievance placed before the High Court was:

  • Assessees had purchased goods/services, paid GST to the supplier, and reflected such ITC in their returns;
  • Yet, ITC was disallowed solely because the supplier did not ultimately deposit the tax with the Government.

The assessees argued that this amounted to punishing the recipient for an act entirely committed by another person, which was outside the recipient’s control.

Reliance on the Statutory Scheme and Practical Constraints

The petitioners relied heavily on the structure of the CGST Act and Rules, especially:

  • Sections 16 to 21
  • Sections 41, 49 and 53
  • Relevant provisions of the CGST Rules, 2017

Their primary submissions included:

  1. No mechanism to verify supplier’s tax payment
    They contended that, under the GST framework, recipients have no legal or practical means to ascertain whether a supplier has discharged GST liability via Form GSTR-3B.

    • Returns like GSTR-1, GSTR-2A and GSTR-2B indicate outward supplies and ITC reflection, but do not give direct visibility into whether the tax has been actually paid in cash or through credit by the supplier.

  2. Existing conditions already ensure genuineness
    The assessees argued that clauses (a), (aa), (b), and (ba) of Section 16(2) already impose conditions that sufficiently validate the genuineness of a transaction, such as:

    • Possession of a valid tax invoice or prescribed document
    • Actual receipt of goods or services
    • Tax having been charged in accordance with law
      They asserted that Section 16(2)(c) adds an extraneous condition not within the control of the assessee.

  3. Equal treatment of bona fide and fraudulent recipients
    One of the central constitutional arguments was that Section 16(2)(c) treats:

    • Bona fide recipients (who pay tax to the supplier and maintain proper documentation), and
    • Fraudulent or collusive recipients
      in the same manner, by denying ITC where the supplier defaults in payment. This, according to them, offended Article 14 (equality before law).