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For GST practitioners, input tax credit (ITC) has long been anchored in a settled compliance framework, possession of a valid invoice, receipt of goods or services, and reflection of the transaction in system-generated statements such as GSTR-2B. The Gujarat High Court’s recent ruling unsettles that framework by foregrounding a more decisive condition: actual payment of tax by the supplier to the Government. This brings to the fore a layered set of legal questions, first, the constitutional validity of Section 16(2)(c) of the CGST Act; second, whether denial of ITC in cases of supplier default offends Articles 14, 19(1)(g), and 265 of the Constitution; and third, whether ITC under GST operates as a vested right arising from a completed transaction or as a conditional entitlement dependent on tax realisation within the system.
The matter, in essence, required the Court to determine whether entitlement to ITC can subsist independently of the supplier’s tax compliance, particularly where the purchasing dealer is otherwise bona fide and fully compliant with statutory conditions.
In its judgment dated 1 May 2026, a Division Bench of the Gujarat High Court, comprising Justice A.S. Supehia and Justice Pranav Trivedi, addressed the constitutional validity of Section 16(2)(c) of the CGST Act in the matter of Maruti Enterprise v. Union of India1.
A central observation of the Court on the primary issue is its clear articulation that input tax credit is intrinsically linked to “taxes paid” and not merely to taxes invoiced or reflected in returns, thereby anchoring entitlement to actual revenue realisation within the GST framework.
How the ITC Dispute Arose Under GST
The present matter originated from a series of actions initiated by the revenue authorities denying input tax credit to purchasing dealers on the ground that the corresponding suppliers had failed to discharge their tax liability. The affected dealers, despite having transacted with registered suppliers, received goods, and availed ITC based on invoices reflected in statutory returns, were subjected to reversal of credit solely on account of such supplier default.
Aggrieved by this position, multiple writ petitions were instituted before the Gujarat High Court challenging the constitutional validity of Section 16(2)(c) of the CGST Act2. The petitioners, comprising various registered dealers, contended that the provision operated arbitrarily by imposing the consequences of supplier non-compliance upon bona fide recipients.
Recognizing the shared legal questions at stake, the High Court consolidated an extensive batch of Special Civil Applications, designating Maruti Enterprise (through its authorized partner Jigneshbhai Bharatbhai Tarpara) v. Union of India & Ors. as the lead matter for adjudication.
The challenge was mounted directly before the High Court in its writ jurisdiction, invoking constitutional grounds including violation of Articles 14, 19(1)(g), 265, and 300A. The reliefs sought included both a declaration of unconstitutionality and, in the alternative, a reading down of the provision to exclude bona fide purchasers from its ambit.
The matter thus came to be adjudicated as a pure question of vires, with the Court expressly confining its analysis to the validity and interpretation of Section 16(2)(c), independent of the factual merits of individual cases.
Arguments by Taxpayers and Revenue on ITC Denial
The petitioners’ challenge was structured around the impossibility and arbitrariness embedded in Section 16(2)(c). Their primary submission was that once the statutory conditions relating to invoice, receipt of goods or services, and reflection in GSTR-2A/2B are satisfied, the transaction stands validated within the GST framework. The additional requirement of ensuring that the supplier has actually paid the tax introduces a condition that lies entirely outside the recipient’s control, knowledge, and verification.
It was contended that the provision fails to distinguish between bona fide purchasers and those acting in collusion with defaulting suppliers, thereby treating unequals alike and violating Article 14. The denial of ITC in such cases was further argued to result in double taxation, as the purchasing dealer effectively bears the tax burden despite having already paid tax to the supplier. The petitioners also invoked the doctrine of lex non cogit ad impossibilia, submitting that the law cannot compel a recipient to ensure compliance by a third party over whom no control exists.
Reliance was placed on VAT jurisprudence, particularly the decisions in On Quest Merchandising India Pvt. Ltd. v. Govt. of NCT of Delhi. and Arise India Limited v. Commissioner of Trade & Taxes, to contend that bona fide purchasers ought to be protected where transactions are genuine and supported by valid documentation.
In response, the revenue advanced a scheme-based defence of Section 16(2)(c). It was submitted that ITC is not a vested right but a statutory entitlement subject to strict conditions, one of which is actual payment of tax to the Government. The provision, when read with Sections 41 and 155 of the CGST Act, reflects a legislative design where the burden of establishing eligibility squarely rests on the claimant.
The revenue further emphasised the structural features of the GST regime, particularly the inter-State credit mechanism and fiscal transfers under Section 53, to argue that allowing ITC without corresponding tax payment would result in revenue loss and distortion of the GST framework. It was also contended that the statutory mechanism of reversal and re-availment ensures that the purchasing dealer is not permanently deprived of credit, but only required to defer it until tax is actually deposited.
The distinction from VAT precedents was strongly pressed, with the revenue arguing that the GST framework, with its integrated credit chain and statutory safeguards, does not permit importation of principles evolved under earlier tax regimes.
Judicial Analysis on Section 16(2)(c)
The High Court approached the matter by situating Section 16(2)(c) within the overall architecture of the GST regime, rather than examining it in isolation. The Court emphasised that the scheme of input tax credit is built on the foundational requirement that credit must correspond to tax actually received by the Government, and not merely to tax reflected in transactional documents.
A key strand of the Court’s reasoning lies in its interpretation of the statutory framework governing ITC. By reading Section 16(2)(c) alongside Sections 41 and 155, the Court held that the entitlement to credit is conditional and contingent, with the burden of establishing eligibility resting on the claimant. The requirement of actual tax payment was treated as integral to this entitlement, forming part of the statutory threshold that must be satisfied before credit can be availed.
The Court also examined the operational mechanics of GST, particularly the role of GSTR-1, GSTR-2A/2B, and GSTR-3B, to clarify that system-generated statements only reflect reported transactions and do not constitute proof of tax payment. The statutory scheme, in the Court’s view, deliberately separates transactional reporting from fiscal realisation, with Section 16(2)(c) bridging that gap.
On the issue of constitutional challenge, the Court held that the provision does not suffer from arbitrariness under Article 14. The uniform application of the condition to all claimants of ITC was viewed as consistent with the statutory design, particularly in light of the self-assessment structure of GST. The argument of double taxation was also rejected, with the Court holding that credit arises only upon fulfilment of statutory conditions, including actual payment of tax, and therefore denial of credit in such circumstances does not amount to impermissible double levy.
In addressing the reliance placed by the petitioners on VAT jurisprudence, the Court undertook a detailed examination of Quest Merchandising India Pvt. Ltd.3 and Arise India Ltd.4 It distinguished these decisions on the ground that they arose under the DVAT framework, which lacked the integrated credit and settlement mechanisms present under GST. The Court noted that the reasoning in those cases did not account for provisions analogous to Sections 41, 53, and 155 of the CGST Act, and therefore could not be transposed into the GST context.
The Court also took note of the decision of the Supreme Court in State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd.5, where the burden of proving ITC eligibility was emphasised, reinforcing the statutory position under Section 155. This was treated as aligning with the scheme of GST, where documentary compliance alone is insufficient to establish entitlement.
Finally, the Court declined to invoke the doctrine of reading down, holding that Section 16(2)(c) is clear, unambiguous, and essential to the functioning of the GST framework, and does not give rise to any constitutional infirmity warranting judicial intervention.
The Gujarat High Court upheld the constitutional validity of Section 16(2)(c) on the basis that input tax credit is anchored to actual tax payment to the Government, and that this requirement forms an integral part of the statutory framework governing ITC. The absence of control over the supplier’s compliance was not considered sufficient to dilute this condition, given the legislative design placing the burden of eligibility on the claimant.
The judgment clarifies that tax realisation operates as the foundation of the credit mechanism, and that transactional compliance however complete does not independently secure entitlement to ITC. The statutory provisions governing reversal and re-availment address the consequences of supplier default, without altering the requirement of actual tax payment.
The implications of this ruling extend directly to the treatment of ITC within the GST framework. System-generated statements such as GSTR-2A and GSTR-2B continue to evidence transactional reporting, but their role remains indicative rather than determinative of eligibility. The statutory burden under Section 155 assumes central importance in substantiating claims of ITC within this framework. In the context of disputes, the ruling is likely to influence the direction of challenges relating to denial of ITC, with greater emphasis on verification of tax payment, timing of reversals, and conditions governing re-availment. At a system level, the decision reinforces GST as a compliance-linked credit structure, where the continuity of credit is dependent on the successful movement of tax through the supply chain.
Citations
Expositor(s): Adv. Archana Shukla
