Denying ITC As Per Section 162c Of GST Act If Supplier Fails To Deposit Tax Is Constitutional Gujarat HC Dismisses Marut

The constitutional validity of denying Input Tax Credit (ITC) under Section 16(2)(c) of the CGST Act when a supplier fails to deposit the collected tax has been upheld by the Gujarat High Court. This ruling came in response to a petition filed by Marut Infrastructure, challenging the denial of ITC on the grounds that their supplier had not remitted the tax to the government. The court affirmed that the recipient's ITC claim is contingent upon the supplier's compliance. This decision reinforces the GST framework's emphasis on the supplier's responsibility in tax collection and remittance. Taxpayers must now intensify due diligence on their suppliers to safeguard their ITC eligibility, especially considering potential scrutiny from tax authorities. Failure to do so could result in significant financial implications, including the loss of ITC and potential penalties.

Section 16(2)(c) of the CGST Act stipulates that ITC can only be claimed if the supplier has actually paid the tax to the government. This provision places a condition on the recipient, linking their ITC eligibility to the supplier's compliance. Non-compliance by the supplier directly impacts the recipient's ability to claim ITC, potentially leading to demands and interest liabilities.

This ruling may lead to increased scrutiny and potential disputes, particularly where there are discrepancies in GSTR-1 and GSTR-3B filings. Businesses should proactively reconcile supplier data and maintain detailed records to defend their ITC claims. Taxpayers may explore indemnity clauses in supplier contracts to mitigate potential losses from supplier defaults.

This ruling creates a precedent that increases the compliance burden on businesses to monitor their suppliers' tax payment behavior, potentially impacting cash flow and profitability.