The Punjab and Haryana High Court upholds the constitutional validity of Section 16(2)(c) of the CGST Act but prohibits mechanical denial of input tax credit, highlighting the need for a balanced approach in GST compliance.
The Punjab and Haryana High Court has upheld the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, but ruled that tax officials cannot deny input tax credit to a buyer in a mechanical way simply because a supplier has not paid the tax onwards to the government.
In a judgment covering 424 writ petitions, the court said the provision remains part of the GST framework because entitlement to input tax credit depends on the tax charged on a supply having actually reached the exchequer. But the bench, led by Chief Justice Ashwani Kumar Mishra and Justice Rohit Kapoor, drew a clear line between that legal condition and automatic reversal of credit in every case of supplier default. According to reports on the ruling, the judges said the law cannot be treated as a stand-alone rule that shifts a seller’s failure directly on to the purchasing dealer.
The dispute arose from a large group of buyers who said they had paid tax to their suppliers, received proper invoices and taken delivery of goods, but later faced show-cause notices and reversal orders after the suppliers failed to deposit the tax or had their registrations cancelled, in some cases retrospectively. The petitioners argued that they had no practical way of checking whether the tax they had paid had reached the government and urged the court to read down the provision on constitutional grounds. The High Court declined to examine each individual case, limiting itself to the statutory framework.
The court’s reasoning also reflected the evolution of GST compliance rules. The original matching system under the Act was meant to track invoices between buyer and seller through a sequence of returns and to regulate credit through a reversal-and-reclaim model. But that mechanism never functioned as intended because of technical difficulties, and the administration moved to the simpler GSTR-3B return. Sections 42 and 43 were later removed, while Rule 37A was introduced in December 2022 to deal with reversal and re-availment of credit once a supplier files a return. Most of the cases before the court, however, predated that rule.
The ruling sits within a broader split among high courts on how far GST authorities may go when a supplier defaults. Reuters-style legal summaries of earlier decisions indicate that the Delhi, Tripura, Gauhati and Karnataka High Courts had all adopted approaches more protective of bona fide buyers, while the Gujarat High Court declined to read down the rule, a position later affirmed by the Supreme Court. Against that backdrop, the Punjab and Haryana bench has now tried to balance the integrity of the tax system with the practical reality that a purchaser cannot directly monitor what a supplier does with the tax collected. The result is a judgment that preserves the statutory requirement, but warns officials against treating supplier default as enough, by itself, to justify credit reversal.
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