Petition challenging Constitutional validity of Sec 16(2)(c) of the CGST Act

Last updated: 15 March 2023

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Quick Summary

Taxpayers are facing the reversal of Input Tax Credit (ITC) if their suppliers fail to file returns or remit taxes, based on discrepancies identified by tax officers. This has led to numerous legal challenges across India questioning the constitutional validity of Section 16(2)(c) and Section 16(4) of the CGST Act. The Delhi High Court is hearing a significant case that could influence other pending petitions concerning ITC availment and related rules.

Court :
High Court of Delhi

Brief :
Taxpayers nationwide are subjected to the harsh consequences of Section 16(2)(c) of the Central Goods and Services Tax ("CGST") / State Goods and Service Tax ("SGST") Acts, 2017. In situations where suppliers have failed to file returns or remit tax on specific supplies, Input Tax Credit ("ITC") already obtained by the respective buyers on the said supplies is reversed. Assessment orders are being made by the appropriate officers authorised under the GST Acts based on portal scrutiny. The mismatch between GSTR 2A and GSTR 3B is used to finish assessments levying tax (reversal of alleged ineligible ITC), interest, and penalty.

Citation :
W.P[C] No.6293 of 2019

Taxpayers nationwide are subjected to the harsh consequences of Section 16(2)(c) of the Central Goods and Services Tax ("CGST") / State Goods and Service Tax ("SGST") Acts, 2017. In situations where suppliers have failed to file returns or remit tax on specific supplies, Input Tax Credit ("ITC") already obtained by the respective buyers on the said supplies is reversed. Assessment orders are being made by the appropriate officers authorised under the GST Acts based on portal scrutiny. The mismatch between GSTR 2A and GSTR 3B is used to finish assessments levying tax (reversal of alleged ineligible ITC), interest, and penalty.

In response, writ applications contesting the constitutionality of Section 16(2)(c) along with Section 16(4) of CGST Act, 2017 are flooding High Courts across the nation.

Present stage of litigation

In Bharti Telemedia v. Union of India (W.P[C] No.6293 of 2019), which is still pending for resolution, the Hon'ble High Court of Delhi has already admitted a writ case challenging the constitutional validity of Section 16(2)(c) along with Section 16(4) of CGST Act, 2017, r/w DGST Act.

The matter was being heard by Justice Rajiv Shakdher and Justice Tara Vitasta Ganju on February 28, 2023. Therefore, it was observed that the embargo imposed under Section 16(2)(c), qua availment of ITC, is analogous to the condition imposed under Section 9(2)(g) of the Delhi Value Tax Act, 2004, which was read down to the extent of bona fide purchases in the case of Quest Merchandising India Private Limited v. Government of NCT of Delhi and affirmed by the Supreme Court and opined that, the outcome of this petition will have an impact on other batch petitions challenging provisions as regards availment of ITC including Rule 36(4) of CGST Rules (unamended) and depending on the outcome of this petition, decision be taken in the remaining matters. The Hon’ble High Court of Delhi listed the matter along with the other pending petitions for hearing on April 19, 2023.

FAQ :

Section 16(2)(c) of the CGST Act leads to the reversal of Input Tax Credit (ITC) for buyers if their suppliers have not filed returns or remitted tax on the supplies made.

Tax authorities are using portal scrutiny, specifically mismatches between GSTR 2A and GSTR 3B, to identify alleged ineligible ITC and issue assessment orders for tax, interest, and penalties.

Writ petitions challenging the constitutional validity of Section 16(2)(c) and Section 16(4) of the CGST Act are being filed and heard in High Courts across India.

The Delhi High Court observed that the restriction on ITC under Section 16(2)(c) is similar to a condition previously struck down under the Delhi Value Tax Act, suggesting a potential impact on the current case.

The outcome of the petition in the Delhi High Court is expected to influence the decision in other pending cases challenging provisions related to ITC availment, including Rule 36(4) of the CGST Rules.