Section 16(2)(c) and 180-Day Rule: Why Genuine GST Buyers Still Pay Twice

A buyer may: Receive genuine goods or services Get valid tax invoices Pay GST to the supplier Have invoices reflected in GSTR-2B Make payment through banking channels And yet, still be subjected to denial of ITC at a later stage merely because of the non-deposit of tax by the supplier with the Government. The 180-Day Rule Makes the Situation Even Worse As per the second proviso of Section 16(2), another level of complication is added.

Key Takeaways

• GST Is Increasingly Shifting Supplier Default Risk Onto Genuine Buyers The Update Different courts in India are having differing opinions on whether ITC should be denied to the buyers who have acted in good faith if the sellers fail to deposit GST despite the existence of genuine transactions.
• A buyer may: Receive genuine goods or services Get valid tax invoices Pay GST to the supplier Have invoices reflected in GSTR-2B Make payment through banking channels And yet, still be subjected to denial of ITC at a later stage merely because of the non-deposit of tax by the supplier with the Government.
• The 180-Day Rule Makes the Situation Even Worse As per the second proviso of Section 16(2), another level of complication is added.
• If they pay timely but the supplier later defaults, the situation of ITC denial might still arise under Section 16(2)(c).
• Conclusion Section 16(2)(c), Rule 37A, and the 180-day payment rule together have changed ITC compliance into one of the most disputed areas under the GST law at present.

GST Is Increasingly Shifting Supplier Default Risk Onto Genuine Buyers

The Update

Different courts in India are having differing opinions on whether ITC should be denied to the buyers who have acted in good faith if the sellers fail to deposit GST despite the existence of genuine transactions.

The Impact

Even after meeting invoice, payment, and documentation criteria, companies are grappling with working capital issues, risk of legal disputes, and at the same time the risk of ITC reversal.

The Action

Enhancing supplier due diligence, carefully preserving transaction records, and continuously monitoring supplier compliance can help taxpayers A lot in reducing their ITC-related disputes.

How Section 16(2)(c) Creates the Main Problem?

Under Section 16 of the CGST Act, businesses are entitled to take Input Tax Credit on their procured goods or services that are meant for business purposes, after complying with the stipulated conditions. Section 16(2)(c) is a contentious provision which takes the supplier to have physically deposited the tax with the Government before the recipient can safely take ITC. The provision, at least in theory, is quite simple. In reality Still it poses a major issue for legitimate businesses.

A buyer may:

• Receive genuine goods or services Get valid tax invoices
• Pay GST to the supplier
• Have invoices reflected in GSTR-2B
• Make payment through banking channels

And yet, still be subjected to denial of ITC at a later stage merely because of the non-deposit of tax by the supplier with the Government. So, this indirectly transfers a certain part of the suppliers compliance responsibility to the purchaser, evenly the purchaser is at no time directly controlling the supplier's tax payment behaviour.

The 180-Day Rule Makes the Situation Even Worse

As per the second proviso of Section 16(2), another level of complication is added. Based on this provision, if a buyer fails to pay a supplier within 180 days of the invoice date, the buyer has to reverse the ITC and interest. This puts businesses in a very tough commercial spot. The law, on one hand, causes buyers to be prompt in their payments to suppliers to not lose the ITC. Then again, the moment the buyer pays the supplier, from a practical angle the buyer no longer has the leverage as to whether the supplier eventually makes the GST payment to the Government or not. That means, businesses bear risk-flipping sides. If they defer payment, ITC reversal is triggered. If they pay timely but the supplier later defaults, the situation of ITC denial might still arise under Section 16(2)(c). Most of the taxpayers think that this in fact penalizes good buyers for the act beyond their control completely.

Rule 37A Added More Compliance Burden Instead of Solving the Problem

To tackle the issue of unmatched ITC, the government came out with Rule 37A and at the same time Section 41 also got amended.

Generally, this is how it works:

There is a possibility to get ITC if the invoices show up in GSTR-2B. But, if the supplier doesn't file GSTR-3B and pay the tax within the prescribed time, the buyer may have to reverse the ITC. Should the supplier deposit the tax, the buyer gets the ITC back. While this method was introduced as a measure to maintain fairness, the businesses are saying that it only legitimises the uncertainty without actually solving it. Besides the purchase time, the buyer will have to keep checking the tax compliance status of the supplier. This for those businesses which procure from many vendors located in different states, turns out to be not only an operationally very hard task but also a commercial nightmare.

Why Businesses Call This an “Impossible Condition”

One of the biggest points in opposition to Section 16(2)(c) is that it creates a duty on buyers that they no way can enforce.

For instance, a buyer:

• Cannot login to the supplier's GST portal
• Cannot even if supplier's cash ledger
• Cannot compel the supplier to file GSTR-3B
• Cannot force the supplier to tax payment to the Government

At best, a buyer may do a GST registration status verification, keep invoices, GSTR-2B reflection monitoring and payment through legitimate banking channels. Besides these, there is hardly any provision in the law that buyers can use to keep supplier's tax compliance under their live observation. This is the reason why several legal experts, and even courts have accepted the doctrine of impossibility in their decisions, stating that law cannot force a person to do what is beyond his control.

High Courts Are Deeply Divided on the Issue

Indian courts are now divided on the interpretation of Section 16(2)(c). Some High Courts have interpreted the provision quite strictly. Gujarat High Court in Maruti Enterprise case and Kerala High Court in similar cases have ruled that ITC cannot be claimed by genuine buyers if the suppliers have not paid tax. Per these courts, ITC is a statutory grace which can be withdrawn by the legislature. However, a few judgments have expressed a more taxpayer-friendly stance.

Tripura High Court in Sahil Enterprises case ruled that if transactions are genuine and there is no fraud or collusion by the purchaser, denial of ITC is a dead issue. Same thing, Karnataka High Court in Instakart Services case held that suppliers' default should not result in bona fide purchasers being punished. Allahabad and Gauhati High Courts have also been favorable towards genuine buyers where the transactions, invoices, and payments are all regular. This division of opinion among High Courts has led to major confusion for businesses all over India as quite often, the result depends on the jurisdiction.

The Supreme Court’s Earlier VAT Principle Still Influences Courts

While the VAT system was merely a setting for the Supreme Court with Shanti Kiran India, the judgement has become a very important one in the cases of GST as well. The court broadly expressed that if the sales were genuine, the sellers were registered on the date of the sales and the payment was routed through the proper channels, then to refuse the credit only on the ground that the supplier had committed a default later would be very unfair. Various High Courts have borrowed from this line of reasoning while interpreting GST disputes under Section 16(2)(c).

Essentially, these decisions together convey a simple and clear message: instead of blaming honest buyers by default, the tax authorities should target the real tax evader as their first point of action.

The Real Problem Is Commercial Uncertainty

The major problem with the current system is not just the interpretation of the laws. It is the unpredictability. Companies are struggling to make accurate forecasts about their NIIT claims today, wondering if these claims might get questioned later because of a supplier's behavior a few months or even years down the line.

This has a direct impact on:

• How to plan for the use of working capital
• Choose among different suppliers
• Maintain good commercial relationships
• Understand potential exposure to litigation
• Have stable cash flows

When it comes to small and medium enterprises, the problems in agreeing on ITC often means such a difficult financial situation that the underlying transactions do not even matter.

Conclusion

Section 16(2)(c), Rule 37A, and the 180-day payment rule together have changed ITC compliance into one of the most disputed areas under the GST law at present. The Government is looking to stop fake invoicing and tax leakage, whereas very often businessmen are of the feeling that the present law setup leads to placing a major burden on the liability of honest buyers for defaults of the suppliers. The judges in some of the courts are still not agreeing, with one group sticking to a strict reliance on the condition laid down in the statute while the other group trying to save the bona fide purchasers from an unfair ITC denial.

Until the Supreme Court settles a final and uniform version of the law, the business people shall have to carry on their operations within a situation where even honest transactions would have a possibility of an ITC uncertainty in the future. And that uncertainty, more than anything else, is what frightens taxpayers to a great extent.

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Official External Resources

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