Constitutional Showdown: Bombay High Court Admits Challenge to GST ITC Restriction on Supplier's Default

 

The Bombay High Court has admitted a significant constitutional challenge against a contentious provision of the Goods and Services Tax (GST) law: Section 16(2)(c) of the CGST Act, 2017. This section is a major pain point for businesses as it denies a recipient the right to claim Input Tax Credit (ITC) if the supplier fails to deposit the corresponding tax amount with the government.

The admission of the writ petition, filed by Christie's India Private Limited, marks a critical juncture in the ongoing legal debate surrounding the principle of "matching" of ITC and the constitutional validity of penalizing a bona fide purchaser for the fault of a third party.

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The Heart of the Dispute: Section 16(2)(c)

Section 16 of the CGST Act lays down the four fundamental conditions for a registered person to be eligible to take ITC on inward supplies of goods or services:

a)     Possession of a tax invoice or debit note.

b)     Receipt of the goods or services.

c)     The tax charged on such supply has been actually paid to the Government, either in cash or through utilization of ITC.

d)     Filing of the GST return (GSTR-3B).

The challenge is specifically directed at Condition (c): the requirement that the tax must have been paid to the government by the supplier.

The Taxpayer's Grievance: Penalizing the Innocent

The key grievance raised by the petitioner and many other taxpayers is that Section 16(2)(c) violates fundamental principles of natural justice and is potentially unconstitutional because it:

v  Creates an Impossible Burden: The recipient (buyer) has no legal mechanism or authority to compel or ensure that the supplier actually pays the tax to the government after collecting it. The buyer's only proof is the valid tax invoice and bank payment to the supplier.

v  Violates Vires of Tax: The provision effectively denies the buyer a statutory credit based on an act (the supplier's default) that is completely outside the buyer's control. A purchaser, having paid both the price and the tax to the vendor, cannot be held responsible for the vendor's subsequent misappropriation or failure to remit the tax.

v  Leads to Double Taxation: If the buyer is forced to reverse the ITC, they essentially end up paying the tax twice: once to the supplier and once to the government.

The constitutional challenge asserts that the provision is arbitrary and unreasonable, potentially violating Article 14 (Right to Equality) and Article 19(1)(g) (Right to practice any profession, or to carry on any occupation, trade or business) of the Constitution of India.

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The Judicial Precedent and Context

While this is a new challenge in the Bombay High Court, the legal ground has been tested before:

v  The Pre-GST Regime: Similar provisions existed under the VAT laws of various states. In several landmark judgments (such as those under the Delhi VAT Act), High Courts had struck down provisions that denied credit to a purchasing dealer due to the default of a selling dealer, provided the purchaser had made a genuine, bona fide transaction.

v  The GST Framework: The fundamental structure of GST's ITC mechanism is based on seamless credit flow. Section 16(2)(c) and its corresponding Rules (like Rule 36(4) on matching) represent a significant friction point, forcing the bona fide recipient to bear the financial cost of the supplier's fraud or default.

The fact that the Bombay High Court has admitted the constitutional challenge means the matter will now be heard on its merits, with the Court issuing notice to the Union of India and the GST Council to present their defense of the section.

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What This Means for Businesses

The admission of this writ petition offers a ray of hope to the entire business community:

1. Implications for Litigation: All taxpayers currently facing demands for ITC reversal under Section 16(2)(c) due to supplier default can cite this matter. While the law remains unchanged until a judicial verdict, this admission provides a strong basis for challenging such demands or seeking protective stays.
2. Focus on Enforcement: The Revenue Department may need to demonstrate that before invoking this section against a recipient, it has exhausted all reasonable avenues to recover the tax from the defaulting supplier. The Courts often inquire whether the Department has taken coercive action against the primary defaulter before penalizing the secondary party.
3. Future Legislation: If the High Court ultimately strikes down the provision, it would force the GST Council to revise the law, potentially moving towards a system where the government bears the primary risk of supplier non-compliance, allowing only in cases of demonstrable collusion or mala fide intent from the recipient.

This case is expected to be a landmark ruling that defines the responsibility of the recipient in the GST chain and determines whether the right to Input Tax Credit is absolute (based on genuine purchase) or conditional (dependent on the supplier’s actions).