Section 16(2)(c) of the CGST Act, 2017 not ultra vires; legislative reform suggested to protect bona fide purchasers
In a landmark ruling, the Gujarat High Court has upheld the constitutionality of Section 16(2)(c) of the Central Goods and Services Tax (CGST) Act, 2017, which mandates the actual payment of tax by the supplier for a recipient to claim Input Tax Credit (ITC). The court, presided over by Justices A.S. Supehia and Pranav Trivedi, rejected the petitioners' argument that the provision is arbitrary and violative of Articles 14, 19(1)(g), 265, and 300A of the Constitution of India.
The petitioners, led by Maruti Enterprise, contended that the provision unfairly penalizes bona fide purchasers due to the supplier's failure to deposit tax with the government. They sought either to declare the provision ultra vires or read it down to apply only in cases involving fraudulent transactions.
However, the court emphasized that ITC is a statutory concession subject to specific conditions under the CGST Act. It ruled that Section 16(2)(c) does not conflict with constitutional principles, as it ensures revenue protection while allowing purchasers to re-avail ITC upon the supplier's payment of tax. The court noted that the GST framework provides mechanisms for reversing and reclaiming ITC, thereby balancing the interests of genuine purchasers and the government's revenue.
Despite upholding the provision, the court acknowledged the practical challenges faced by purchasers and urged legislative reform to safeguard bona fide recipients from supplier defaults. It suggested implementing technology-driven systems for real-time verification of tax payments, thus shielding honest purchasers from financial burdens.
The judgment is a significant development in the ongoing debate over the GST regime and its impact on businesses. While affirming the provision's validity, the court's call for reform highlights the need for a more equitable system that addresses the concerns of legitimate taxpayers.
Bottom line:-
Central Goods and Services Tax Act, 2017 - Section 16(2)(c) - Provision regarding denial of Input Tax Credit (ITC) based on non-payment of tax by the supplier upheld - Court declined to read down the provision or declare it ultra vires - ITC is a statutory concession, not a vested right, and is subject to conditions prescribed under the Act.
Statutory provision(s): Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, Section 41(2), Rule 37A, Articles 14, 19(1)(g), 265, and 300A of the Constitution of India
Maruti Enterprise v. Union of India, (Gujarat)(DB) : Law Finder Doc id # 2892422
