The Provision Holds, the Buyer Hopes: Section 16(2)(c) Survives Challenge

The Provision Holds, the Buyer Hopes

June 11, 2026

AANCHAL KAPOOR – CA
GARIMA ARORA – Article Assistant

Section 16(2)(c) Survives Challenge, yet the Court Presses the Government to Shield Honest Purchasers

Prologue: The Door Holds—But the Court Has Knocked

In the world of tax jurisprudence, when a constitutional court of the stature of the Gujarat High Court tells the Government — in a reported judgment approved for publication — that "it is high time" to act, that unscrupulous sellers must not be allowed to "enrich themselves at the expense of both the public exchequer and honest buyers," and that the Government must implement systems to insulate bona fide recipients from vendor defaults, that is not just an observation. That is a judicial expectation carrying the weight of constitutional authority. It is an expectation that the Government cannot afford to ignore.

So yes — Section 16(2)(c) stands. The law has not changed today. The honest purchaser who has paid tax to a registered supplier and finds his ITC denied because of that supplier's default must still navigate the reversal and re-availment mechanism under Section 41(2) and Rule 37A. He must still wait. The battle for a direct statutory remedy for the bona fide purchaser is not over. It is a ruling that will redraw the contours of the Section 16(2)(c) debate in ways that go well beyond the operative conclusion.

But what has changed — and what this article seeks to highlight — is that the highest court of Gujarat has now placed on record, in unmistakable terms, that the current state of affairs is not satisfactory, that the burden on genuine purchasers is real and disproportionate, and that the solution must come through legislative action, administrative reform, and technological innovation. Para 88 of this judgment is not a consolation prize. For the taxpayer community, it is a roadmap. For the Government, it is an obligation.

The door may not have been opened today. But the Court has told the Government—clearly, publicly, and on the record—that it is time to find the key.

In the high-stakes arena of modern commerce, supply chain integrity isn't just about logistics and timely deliveries—it is a critical, systemic financial liability.

Picture this: your enterprise negotiates a massive procurement contract, pays the vendor's invoice in full (including the hefty GST component) in absolute good faith, and confidently balances the books. But months later or may be years, the tax authorities knock on your door. Your vendor pocketed the money and vanished, or simply failed to remit that collected tax to the Government exchequer. The fallout? The state machinery denies your company its rightful Input Tax Credit (ITC), effectively forcing you to pay the tax again and penalizing your honest business for the sins of a rogue supplier.

This isn't a hypothetical stress test; it is a daily, multimillion-rupee reality. The fierce friction between equitable business realities—where a bona fide purchaser cannot possibly police a vendor's tax filings—and the rigid, unforgiving machinery of national revenue collection has finally reached a boiling point.

It is precisely this tension — unresolved, and commercially suffocating for thousands of honest businesses across India — that finally found its way to the constitutional courtroom of the Gujarat High Court, petition filed by Maruti Enterprises through its Authorised Partner Jigneshbhai Bharathbai Tarpara versus Union of India & Ors. (R/Special Civil Application No. 18080 of 2023) with judgement pronounced on 1st May 2026, and the answer, while not what many had hoped for, carries within it something that the taxpayer community cannot afford to overlook.

Issues Involved

The writ petitions collectively brought forward the following primary legal challenges before the Hon'ble High Court:

• Constitutional Validity: Whether Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act) is arbitrary, ultra vires, and violative of Articles 14, 19(1)(g), 265, and 300A of the Constitution of India.
• Application of Provision: Whether Section 16(2)(c) should only apply to such transactions that are found to be fraudulent, collusive or involving connivance between purchasing and selling dealer, thereby shielding bona fide purchasers from the denial of ITC due to their supplier's default.
• Double Taxation: Whether the denial of ITC to a purchaser who has already paid the tax component to the supplier amounts to double taxation, shifting the burden of Section 9(1) of the CGST Act arbitrarily onto the recipient thereby, punishing an innocent buyer for the sins of the seller.
• The Impossibility Defense (Lex non Cogit Ad Impossibilia): Does Section 16(2)(c) compel the impossible by making a buyer's Input Tax Credit (ITC) strictly contingent upon the supplier's actual payment of tax?
• Past Precedents: Can past judicial precedents by High Courts and the Supreme Court, which 'read down' or softened stringent conditions in earlier tax laws, be directly applied to mitigate the rigor of Section 16(2)(c) of the current CGST Act?

Important Disclaimer: A Verdict on the Statute, Not the Specifics

Before delving into the crux of the matter, a vital judicial parameter must be established: The High Court intentionally refrained from adjudicating the factual matrices or individual merits of the underlying petitions. To maintain judicial economy and avoid prolixity, the Court also bypassed a labyrinth of repetitive case laws. This landmark judgment is exclusively a constitutional acid test—a laser-focused examination restricted solely to the vires (constitutional validity) of Section 16(2)(c) of the CGST Act.

Taxpayer's Arguments

The petitioners, representing the bona fide purchasers, mounted a multi-pronged constitutional challenge against Section 16(2)(c), arguing that the provision unfairly penalizes honest businesses for the defaults of third-party vendors.

The Touchstones of Genuineness vs. The Uncontrollable Variable: (As per Para 8 and 9): The petitioners argued that Section 16(2) lays down six chronological conditions for availing ITC. Clauses (a), (aa), (b), and (ba) alone secure the genuineness of the transaction i.e. by ensuring the purchaser has a valid tax invoice clause(a), the details are auto-populated in GSTR-2B clause(aa), and the goods or services were actually received clause (b) and the absence of any restriction of the said credit under Section 38 of the CGST Act under clause (ba). Clause (c), however, introduces a variable completely outside the purchaser's domain of control: the supplier's actual payment of tax to the Government. Penalizing a purchaser when genuineness is already established by the other clauses is inherently arbitrary.

The Revenue cannot therefore, while defending the vires of clause (c), reintroduce the issue of genuineness as an answer to the constitutional challenge, whereas, the genuineness has been cumulatively placed by Parliament under clauses (a), (aa), (b) and (ba), not only under clause (c).

Violation of Article 14 (Right to Equality): (As Per Para 9 and 11): The rule of equality is violated when equals are treated unequally, but also when unequals are treated alike. The petitioners contended that Section 16(2)(c) treats honest, diligent purchasers identically to dishonest purchasers who collude with bogus suppliers. Failing to distinguish between these two unequal classes constitutes hostile discrimination and violates Article 14 of the Constitution relying upon Arpit Pravinbhai Shah (Gujarat HC).

Reference to past precedents: (As per Para 10): The singular failure of the legislature to differentiate between these two manifestly unequal classes, while visiting upon both the identical penal consequence of denial of ITC is precisely the vice condemned by the rulings from the Delhi High Court in case of On Quest Merchandising as affirmed by the Supreme Court by dismissing SLP in Arise India Ltd. and approving Shanti Kiran India. Reliance also placed on Karnataka HC in case of Tallam Apparels. Historically, the higher judiciary has firmly rejected the practice of punishing compliant businesses for the tax defaults of rogue vendors.

The Maxim of Impossibility (Lex non Cogit Ad Impossibilia): (As per Para 12): The purchaser has no means, and cannot be legally equipped with the means, of verifying whether his supplier's discharge of liability. Citing the legal maxim in Para 17, the petitioners contended that a purchaser cannot be mandated to perform an action beyond their control, such as verifying a supplier's confidential GSTR-3B filings or actual tax remittances.

Unconstitutional Tax and Failure of Proportionality: (As per Para 13 to 15): The petitioners argued that denying ITC after the purchaser has already paid the supplier results in unconstitutional double taxation, violating Article 265. Because neither Section 9 nor 16 authorizes collecting the same tax twice, this penalization directly defeats GST's primary goal of eliminating cascading taxes—an objective enshrined in the CGST Bill and previously acknowledged as a severe hardship for genuine buyers during the 26th GST Council meeting. Under Section 9(1) of the CGST Act, the legal liability to pay tax rests squarely on the supplier. The supplier collects this tax from the recipient to pass it to the Government. Recipient liability (Reverse Charge) under Section 9(3) is strictly limited to specific, notified categories. Furthermore, denying ITC arbitrarily violates the fundamental right of freedom of trade under Article 19(1)(g) of the Constitution of India. A tax law fails the legal "proportionality test" if it discourages ordinary commerce with registered suppliers as it makes honest compliance impossible or create an impossible business disincentive. True proportionality requires the State to adopt the least restrictive measure available.

Creation of a Vested Right & Arbitrary Retrospective Impact: (As per Para 16 and 18) - Under Rule 60(1) and Rule 60(7) of the CGST Rules, 2017, the GST portal provides recipients the outward supply details of supplier via Form GSTR-2A and an auto-drafted ITC statement via Form GSTR-2B respectively. For genuine commercial transactions, once the ITC reflects in Form GSTR-2B and is claimed by the recipient based on that official statement, it becomes a legally vested right. Disallowing this credit at a later date due to a subsequent inquiry into a supplier's default strips away a right already granted to the recipient, penalizing them for a fault they did not commit. Because the provision revokes ITC several years after it was lawfully claimed and matched against the government's own portal data, it operates retrospectively, creating an unexpected and severe financial burden on genuine buyers.

This retroactive cancellation of matched credit is manifestly arbitrary and directly violates three core fundamental/constitutional rights (Articles 14, 19(1)(g), and 300A) under the Constitution of India. To support this, they invoked the internationally accepted principle from the European Court of Justice's Axel Kittel ruling, which dictates that VAT deductions should only be denied if the buyer explicitly knew, or should have known, that the transaction involved fraud by the seller, thereby protecting genuinely unaware purchasers.

Respondent's Defense (Revenue's Perspective)

• ITC is a Statutory Entitlement, Not a Vested Right: (As per Para 29): The Revenue argued that the claim of ITC is not a fundamental or absolute vested right, but a "concession" or "entitlement" granted by the statute. Therefore, it is strictly subject to the conditions and restrictions provided under the CGST Act, which must be interpreted literally. Hardship to a dealer cannot be a ground to invalidate a taxing provision, as there is no equity in taxation.
• The Safeguard of Section 41(2) & Rule 37A (No Permanent Prejudice): (As per Para 22&27): Countering the "double taxation" argument, the Revenue pointed to the substituted Section 41(2) of the CGST Act and Rule 37A of the CGST Rules. These provisions mandate that if a supplier defaults, the purchaser must reverse the credit. However, if the Revenue recovers the tax from the defaulting supplier, or the supplier eventually pays, the purchaser is legally entitled to re-avail that exact credit in the succeeding month. Thus, the Government is not unjustly enriched twice, and the purchaser is not permanently prejudiced.
• The Burden of Proof (Section 155 of CGST Act): (As per Para-24)- The revenue made the specific reference to this provision which puts the burden of proof upon the person (i.e. Purchasing Dealer) claiming the input tax credit.
• The Catastrophic Impact on Inter-State Trade (Section 53): (As per Para-24): Under the destination-based GST regime, Section 53 obliges the originating State Government to transfer the tax component utilized by an inter-state supplier to the destination State. If a purchaser is allowed to claim ITC merely on an invoice while the supplier defaults, the originating State would be legally forced to transfer funds it never actually received to the destination State, causing colossal revenue losses in every tax period.
• No Equity in Taxation: (Para 30): Taxpayer hardship cannot be used as an excuse to invalidate Section 16(2)(c), as tax laws do not operate on principles of equity.
• Clear & Unambiguous Language: (Para 31): Relying on Supreme Court precedent (American Express Bank Ltd.), the Revenue argued that the language of the provision is clear & unambiguous.
• Rejection of "Reading Down": (Para 32): Citing further precedent (Central Bank of India vs. Shanmugavelu (SC)), the Revenue asserted that courts cannot judicially soften or "read down" a statute simply because it is harsh, as long as its plain meaning is legally valid.
• Section 41(2) and Section 155 Must Be Read Conjunctively: (Para 33): Even in the absence of Section 16(2)(c), the statutory framework remains intact through Section 41(2). Section 41(2) of the CGST Act will remain in the statute book, which carries the same philosophy underlying Section 16(2)(c) of the CGST Act, which is, in fact, suggestive of the scheme of the legislation in tune with its SOR. Concurrently, Section 155 independently mandates that the burden of proving ITC eligibility rests entirely upon the claimant.
• The Invalidation of Tallam Apparels: (Para 36): Reaffirming the Strict Burden of Proof for ITC Claims- The Supreme Court, in Ecom Gill Coffee Trading, invalidated the Karnataka High Court's judgment in Tallam Apparels. The Apex Court clarified that Tallam Apparels incorrectly relied on the On Quest Merchandising ruling, which had not addressed the specific statutory burden of proof. Crucially, the Supreme Court established that a purchaser cannot discharge this burden of proof simply by presenting invoices or showing that payments were routed through banking channels.
• Distinguishing Past Precedents: (Para 37): That reliance placed by the petitioners on the Judgments rendered by (i) Tripura High Court in the case of Sahil Enterprises v. Union of India, (ii) Karnataka High Court in the case of M/s. Instacart Services Pvt. Ltd. vs. Union of India and (iii) Gauhati High Court in the case of National Plato Moulding v. State of Assam, are also not helpful to the petitioners, since all the three Judgments have been rendered while following the Judgment of the Delhi High Court in the case of On Quest Merchandising India (P) Ltd. (supra), and without considering the Judgment of the Supreme Court in the case of Ecom Gill Coffee Trading Pvt. Ltd. (supra).
• The Crucial Distinction Between TDS and ITC: (Para 40): The Revenue argued that reliance placed on the decision of this Court in the case of Arpit Pravinbhai Shah (supra) is also completely misplaced and not applicable to the facts of the present case. Under the Income Tax Act, Section 205 explicitly protects an assessee from a direct tax demand if TDS is deducted on said income. However, the GST framework contains no equivalent protective provision, meaning purchasers cannot invoke this defense to protect their Input Tax Credit when a supplier defaults.

The Foundation of the Court's Reasoning

The Court's entire analysis was anchored in a foundational principle derived from the CGST Act's Statement of Objects and Reasons (SOR): Input Tax Credit is intrinsically tied to actual tax flows ("taxes paid on any supply") into the Government treasury, not merely private invoiced amounts. By establishing that actual payment to the exchequer is the absolute bedrock of the ITC mechanism, the Court used this standard as the ultimate yardstick to evaluate every argument raised by the petitioners. ITC is intrinsically connected with factum of taxes paid "input tax credit by making it available in respect of taxes paid" (Para 42 & 43).

Issue 1: Why the Provision of Section 16(2)(c) is Constitutionally Valid?

Answer: The Four Pillars Upholding the Constitutional Validity of Section 16(2)(c) Of CGST Act, 2017.

The first and most important reason is that Input Tax Credit is not a fundamental right, a vested right, or an absolute right. It is a statutory concession extended by the legislature subject to conditions and restrictions. When the legislature grants a concession, it has the full authority to prescribe the conditions under which that concession can be availed. The condition that the supplier must have actually paid the tax to the Government is a legitimate, rational, and necessary condition for granting ITC - and a court cannot relax it merely because compliance is difficult or creates hardship.

The second reason flows from the nature of the GST framework itself. Unlike the earlier VAT regime where tax credits remained confined within the originating State, GST is a destination-based tax where ITC crosses State lines for inter-State supplies. Section 53 of the CGST Act mandates that when credit is availed, the originating State must transfer the corresponding tax amount to the destination State. If a supplier in the originating State defaults on tax payment yet the purchasing dealer is allowed to continue claiming ITC, the originating State would be compelled to transfer funds it never actually received. This would not only cause enormous revenue loss but would fundamentally destabilise the fiscal architecture of the entire GST system. This cross-State fiscal dimension was a powerful structural reason to uphold Section 16(2)(c) that had not been considered by any of the High Courts that had read down similar provisions.

The third reason is Section 41(2) of CGST Act, 2017 that the statutory framework ensures the purchaser is not permanently punished. While the buyer must temporarily reverse the ITC (with interest) when a supplier defaults, they are legally entitled to re-avail that exact credit the moment the supplier eventually pays the tax to the Government. Mere delay or hardship in availing ITC, the Court held, is not a valid constitutional ground for striking down or reading down the provision.

The fourth reason is Section 155 of the CGST Act, 2017 which places the burden of proving ITC eligibility squarely on the person claiming it. The Court identified this as a transformative provision that had been overlooked by both the Delhi High Court in On Quest Merchandising and the Tripura High Court in Sahil Enterprises. Under Section 155, a purchaser's eligibility for ITC is not established by mere possession of an invoice or receipt of goods — it has a direct nexus with the actual payment of tax by the supplier. This means the ITC claimant must discharge the burden of establishing not just that a transaction occurred but that the full chain of statutory compliance, including tax deposit by the supplier, has been completed.

The Strict Contours of Tax Jurisprudence: Interpreting Concessions and Compliance

In the realm of tax jurisprudence, it is a well-settled principle that equitable considerations hold no water when interpreting taxing statutes. Drawing upon the foundational jurisprudence of the Supreme Court, most notably in Modi Sugar Mills, the courts are bound to a strict, literal approach. A tax statute must be examined squarely on its explicit words—without presumptions, assumptions, or implied meanings. The judiciary cannot import provisions or supply assumed legislative deficiencies to craft a more favorable outcome. In taxation, the law is exactly what is clearly expressed, leaving no room for equitable adjustments.

However, this literal interpretation does not sanction reading statutory clauses in a vacuum. Relying on the precedent established in Kailash Chandra, a core tenet of statutory interpretation requires that provisions be read holistically. When different sections of a statute deal with interconnected subject matter, they must be read harmoniously and conjointly. Isolating a single provision ignores the broader legislative architecture and can distort the intended application of the law.

This interpretative framework is particularly vital when addressing the legal nature of Input Tax Credit (ITC). Through a decisive line of Supreme Court rulings, including ALD Automotive, the judiciary has unequivocally clarified that ITC is not an inherent, vested, or constitutional right of a taxpayer. Rather, it is purely a statutory concession or benefit crafted by the legislature. It falls exclusively within the legislative domain to dictate how much tax credit is granted and under what precise circumstances it may be claimed.

Because ITC is a conditional concession rather than a fundamental right, the legal threshold for claiming it demands absolute and strict compliance. A taxpayer can only avail themselves of this benefit by strictly adhering to the exact scheme and conditions laid out in the statute, such as the mandatory production of original tax invoices. For practitioners and dealers alike, the mandate is clear: statutory concessions in tax law offer no leeway for substantial compliance or equitable relief; they require exact fulfillment of every legislative prerequisite.

Issue 2: Why Reading Down of Section 16(2)(c) was Refused?

Answer:

Relying upon the judgement of Supreme Court, in the case of Authorized Officer, Central Bank of India (supra), the court has outlined the doctrine of "reading down" as a fundamental judicial tool used to interpret statutes in a way that preserves their constitutional validity rather than striking them down. "Reading down" is an interpretative approach where a court assigns a restricted, narrowed, or sometimes expansive meaning to a statutory provision to resolve legal or constitutional conflicts that would arise from a strictly literal reading. Courts operate on the "golden rule" of respecting legislative wisdom, presuming that lawmakers do not intend to draft invalid laws. Reading down is a judicial interpretive tool that allows courts to construe a provision narrowly to save it from unconstitutionality. It can only be invoked when the plain and literal interpretation of a provision gives rise to genuine constitutional infirmities. It is a last resort, and harshness of a provision alone is not a ground to invoke it. Where a provision's language is clear and unambiguous and its plain reading does not create constitutional problems, reading down is simply not available.

• The Court found that Section 16(2)(c), read with the full scheme of the CGST Act including Sections 41, 53, and 155 and Rule 37A, does not give rise to any constitutional infirmity. The provision is clear, its purpose is legitimate, and its operation is balanced by adequate statutory safeguards. Therefore, the conditions for invoking reading down are simply not met.
• Eligibility for Input Tax Credit (ITC) under the CGST Act requires cumulative compliance with all conditions outlined in Section 16(2), clauses (a) through (d). These clauses must be read conjointly, not in isolation.
• The Court also noted that reading down the provision would trigger the cascading Section 53 fiscal consequences discussed earlier — meaning that reading down would not merely benefit individual purchasers but would destabilise the entire inter-State tax transfer mechanism, making the GST scheme unworkable.
• The court did not find that the provision of Section 16(2)(c) if read with the scheme of GST regime as discussed, conflicts with constitutional or legal principles.

Issue 3: Why the Double Taxation Argument Failed?

Answer:

The petitioners argued that denying ITC to a purchasing dealer who has already paid GST to the supplier effectively taxes the same supply twice — once when the supplier collects it and again when the purchaser is denied the credit. The Court rejected this argument as misconceived. Double taxation in the legal sense refers to the same income or transaction being subjected to tax twice under two separate charging provisions. What happens under Section 16(2)(c) is different — the purchasing dealer is not being taxed again on the same supply. Rather, the purchasing dealer is being denied a statutory concession — ITC — because a precondition for that concession has not been met. The statute itself provides for reversal and re-availment, which means that once the supplier pays the tax, the purchaser recovers the full credit. There is no permanent tax burden — only a conditional and restorable deferral.

Issue 4: Why the Impossibility Argument Failed?

Answer:

The Court held that the law does not require buyers to forcibly compel suppliers to pay tax. It merely requires buyers to monitor compliance via GSTR-2B and reverse the ITC if the supplier defaults. The scheme of the GST regime does not strictly attract the intent of the maxim ImpotentiaExcusatLegem, which means a disability that makes it impossible to obey the law can be excused. As previously held, the provisions of Section 41 of the CGST Act read with Rule 37A of the CGST Rules, 2017 recognizes that purchaser are not unfairly penalized for a supplier's default. Furthermore, the Court made an important practical observation — when entering into commercial contracts, a purchaser can include indemnity clauses holding the supplier liable for any ITC loss caused by the supplier's failure to deposit tax. Hence, the doctrine of impossibility does not apply.

ADVICE TO BONAFIDE PURCHASER: The scheme of the Act contemplates that a bona fide purchaser must exercise due diligence and, upon becoming aware of non-compliance by the supplier, refrain from further transactions that would perpetuate the credit chain.

Issue 5: Past Precedents — Can the judicial precedents of Pre or post GST period that "read down" or softened the stringent conditions of the GST or Value Added Tax (DVAT) Act—be applied to invalidate or soften Section 16(2)(c)?

Answer:

The Gujarat High Court rejected the application of prior DVAT rulings (On Quest Merchandising (supra) and Shanti Kiran(supra)) and disagreed with the Tripura High Court (Sahil Enterprises(supra)):

1. Fundamental Differences Between DVAT and CGST: The Court ruled that the judicial "reading down" of the old Delhi VAT laws cannot be replicated for GST because the legal frameworks are materially different:
   • Ambiguity vs. Clarity: The DVAT provision was vague and gave tax authorities unconstitutional, unguided discretion. CGST Section 16(2)(c) is unambiguous and strictly targets the purchaser. Purchasing dealer cannot be asked to do impossible i.e to anticipate the selling dealer.
   • Blindness vs. Transparency: Under DVAT, confidentiality rules made it impossible for buyers to check a seller's tax filings. Under CGST, the GST portal (GSTR-2A/2B) provides total transparency.
   • Permanent Penalty vs. Corrective Mechanism: DVAT offered no remedy for a seller's default. CGST allows for a temporary reversal and subsequent re-availment of the credit once the supplier pays (Section 41(2) & Rule 37A).
   • Burden of Proof: The CGST Act explicitly places the burden of proving ITC eligibility on the claimant (Section 155), a strict mandate absent in DVAT.
   • Inter-State Fiscal Impact: Unlike local VAT, GST involves cross-state fund transfers (Section 53). Applying the DVAT logic to GST would force states to transfer non-existent funds, destabilizing the national economy.

The Gujarat High Court explicitly disagreed with the earlier rulings (which had applied the DVAT logic to GST). The Court noted that there is an analytical gap because it oversimplified ITC as merely a tool against double taxation, completely ignoring its role in protecting national revenue integrity and cross-state fiscal balance. This direct contradiction between High Courts will ultimately require a Supreme Court resolution.

Reliance placed on Kerala High Court in the case of M Trade Links Vs. Union of India, 2024 SCC OnLine (Ker.) 2744; stating ITC is not an absolute right but is an entitlement subject to the conditions and restrictions prescribed under the Statute, the conditions, restrictions and time limit specified by law from the fulcrum on which the grant of ITC and tax collection for each financial year are balanced. Under the VAT law, the ITC did not cross the originating State.

The Silver Lining: The Court's Strong Directions to the Government (Para 88)

It would be a serious misreading of this judgment to treat it as an unqualified defeat for the purchasing dealer. While the Court firmly declined to strike down or read down Section 16(2)(c), it did not abandon the honest buyer caught in the crossfire. In Paragraph 88, the Court delivered a carefully balanced coda - and it is here that the verdict quietly turns in the taxpayer's favour.

At the outset of Paragraph 88, the Court was candid: Section 16(2)(c) is to be viewed from a regulatory standpoint and is anchored in the legitimate objective of maintaining the integrity of the tax chain and preventing systemic revenue loss to the Government. To that extent, the provision stands wholly unshaken. However, in the very same paragraph the Court declared that it is "high time" the Government undertook a comprehensive re-evaluation of the dicey situation in which bona fide purchasers are placed. It recorded a pressing need for legislative amendments or clarifications within the GST framework to alleviate the disproportionate financial and administrative burdens currently imposed upon purchasers who hold an honest claim of ITC. Going beyond mere policy changes, the Court directed that the Government implement a robust, technology-driven tracking mechanism capable of verifying, in real time, the payments made by suppliers against specific invoices - thereby insulating bona fide recipients from the defaults of their vendors. Simultaneously, it directed the Revenue to take prompt and immediate steps to recover the tax from the erring suppliers, instead of compelling honest purchasers to pursue cumbersome alternate remedies. The Court was unequivocal that, in the absence of stringent oversight, unscrupulous sellers could enrich themselves at the expense of both the public exchequer and honest buyers.

Why does Paragraph 88 turn positive for the taxpayer?

Because a constitutional court, even while upholding the vires of the provision, has placed on record an authoritative judicial acknowledgment that the present mechanism inflicts a disproportionate and unfair burden on the diligent purchaser - and has converted that acknowledgment into a direction to the Government to remedy it. For the practitioner, this transforms a ruling that is technically adverse on validity into a potent instrument of persuasion. Paragraph 88 can be invoked in representations before the GST Council, in support of pleas for proportionate treatment and contractual indemnity, and as persuasive judicial recognition that the consequences of a supplier's default ought not, as a matter of fair policy, to rest on the shoulders of the honest buyer. The letter of Section 16(2)(c) survives intact — but, by virtue of Paragraph 88, its harsh edge now stands judicially flagged for legislative and administrative correction.

Author's Postscript: The Missing Dimension of Primary Liability and Systemic Equity

While the judgment in Maruti Enterprises masterfully untangles the inter-state fiscal architecture of the GST regime, a holistic critique reveals a profound systemic angle that the Hon'ble High Court overlooked. By focusing heavily on the "statutory concession" narrative, the Court inadvertently shielded the Revenue department from its primary administrative duty: policing and prosecuting the actual perpetrators of tax evasion.

1. The Failure to Enforce Primary Liability against the Defaulter

The most conspicuous gap in the judgment is the omission of a sequential recovery mechanism. The CGST Act grants the tax authority immense coercive powers—including proceedings under Sections 73/74/74A, provisional attachment of bank accounts and assets (Sec 83), penalties and criminal arrest u/s 132—to pursue defaulting suppliers.

By validating an immediate, automated reversal of Input Tax Credit (ITC) from the buyer, the Court essentially condones administrative convenience. Instead of deploying its vast state machinery to track down the rogue seller who pocketed the tax, the Revenue is permitted to take the path of least resistance: penalizing the compliant, stationary buyer who is easily accessible. The innocent buyer is effectively turned into an involuntary insurer of the State's revenue losses.

2. The Ignored Precedent: D.Y. Beathe Enterprises & LGW Industries

To make its jurisprudence truly holistic, the Court should have incorporated the landmark principle articulated by the Madras High Court in M/s. D.Y. Beathe Enterprises v. State Tax Officer 127 taxmann.com 80 (Madras) (2021).

In D.Y. Beathe (supra), the court confronted an identical scenario where the buyer had paid the tax to the seller, but the seller failed to remit it to the government. The Madras High Court held that recovery actions must, as a matter of natural justice and administrative fairness, be initiated against the selling dealer first. The court set aside the assessment order against the buyer precisely because the Revenue had failed to launch an inquiry or recovery proceedings against the defaulting seller despite knowing they were active. By failing to adopt or even reconcile this principle, the Maruti Enterprises judgment allows the Revenue to skip the thief and directly penalize the victim.

In LGW Industries Ltd. v. Union of India, [2022] 134 taxmann.com 42 (Calcutta), the Court ruled that Input Tax Credit (ITC) cannot be denied solely because suppliers were later deemed fake, provided the buyer can prove the transactions were genuine, supported by documents, and completed before the suppliers' GST registrations were cancelled.

3. The Fallacy of the "Concession" Label in a Modern GST Era

The judgment relies heavily on older, VAT-era Supreme Court precedents (such as ALD Automotive and Jayam & Co) to label ITC as a mere discretionary "concession" or "bounty" granted by the legislature. However, this line of reasoning misses the constitutional shift brought about by the 101st Constitutional Amendment Act, which introduced GST.

GST was structurally designed to eliminate cascading taxes and ensure a seamless, uninterrupted flow of credit across supply chains. To reduce the absolute core mechanism of this tax system—the ITC—to a mere "gift" that the State can conditionally withdraw at any point is to ignore the fundamental structural transformation that GST was intended to achieve.

4. The Fallacy of the Technological Representation

The Court notes that buyers should utilize the GSTR-2B portal to monitor compliance, yet it fails to grasp the legal doctrine of legitimate expectation arising from this infrastructure. When the Government's own automated portal populates an eligible credit in a recipient's GSTR-2B statement, the State makes a formal technological representation that the transaction is secure for credit availing. To subsequently revoke that credit due to a supplier's failure to file GSTR-3B is fundamentally inequitable. The State cannot construct a multi-billion-rupee digital gatekeeper, explicitly signal a "green light" to a purchasing dealer, and then penalize that dealer for walking through the gate.

5. The Systemic Misapplication of Section 155 and Ecom Gill

The mechanical linkage of Section 155 with Section 16(2)(c) is legally flawed. The ratio decidendi of Ecom Gill(supra) does not compel the recipient to establish that the supplier deposited the tax with the government exchequer. Rather, the Apex Court explicitly held that to lawfully discharge the evidentiary burden cast under Section 155 of the CGST Act, the purchasing dealer is solely required to prove the substantive genuineness of the transaction confining to demonstrating the actual physical movement and delivery of the goods through corroborative evidence.

Using potential revenue loss to justify denying Input Tax Credit effectively shifts the Department's own statutory recovery burden onto innocent recipients. This identical "revenue loss" defense was comprehensively tested and struck down under the erstwhile Delhi Value Added Tax (DVAT) regime.

Denouement: The Unfinished Architecture

The ruling in Maruti Enterprises serves as a stark reminder that in the theatre of tax jurisprudence, literalism often eclipses equity. By firmly upholding the constitutional validity of Section 16(2)(c), the Gujarat High Court has reinforced the state's fiscal fortress, prioritizing macro-economic stability and cross-state fund transfers over individual merchant grievances.

For the foreseeable future, the judiciary has drawn an unforgiving line in the sand: the public exchequer will not insure honest businesses against the failures of their private supply chains. The inclusion of Paragraph 88 stands as a profound judicial admission that the current administrative framework inflicts a disproportionate, commercial suffocation upon the diligent buyer. By publicly directing the Government to engineer real-time technological tracking and to aggressively prosecute rogue sellers rather than defaulting to the easiest target, the Court has effectively issued a mandate for structural reform.

The provision holds. But for the first time, the buyer's hope is not merely a plea—it is a judicial directive waiting to be implemented.