GST Council To Form Officers Committee On Section 16(2)(c) Input Tax Credit Denial

Union Finance Minister Nirmala Sitharaman announced that an officers' committee will examine the contentious blocking and reversal of Input Tax Credit (ITC) for honest buyers when upstream suppliers fail to deposit taxes or pass on fake credits. The decision was reached during the 57th GST Council meeting in New Delhi, where the panel agreed to review the operation of Section 16(2)(c) of the CGST Act and present its recommendations within three months.

Section 16(2)(c) dictates that a buyer can only claim input tax credit if the supplier has deposited the underlying tax into the government treasury. Under current enforcement practices, tax authorities routinely disallow credit and issue recovery notices to recipient businesses if any seller along the value chain defaults or turns out to be a fraudulent shell entity.

Judicial Pushback Against Credit Reversals

The automatic denial of credit to recipient businesses has triggered extensive litigation across India. Genuine buyers maintain that penalising them for supplier defaults is unconstitutional because they have met all statutory conditions within their control, including holding valid tax invoices, physically receiving goods or services, and transferring full payment including tax amounts through banking channels.

High Courts in Calcutta, Madras, Punjab & Haryana, and Tripura have delivered rulings favoring recipient businesses. These judgments established that tax authorities must first exhaust statutory recovery mechanisms directly against defaulting sellers before denying credit to a bona fide buyer, unless explicit collusion is proven. However, the Central Board of Indirect Taxes and Customs (CBIC) has challenged these reading-down judgments at the Supreme Court level.

Officers Committee Given Three-Month Deadline

Addressing the post-meeting press conference, Finance Minister Sitharaman highlighted that protecting genuine taxpayers from losing credit due to defaults higher up the supply chain was a central agenda item. The GST Council decided to refer the proposed amendment of Section 16(2)(c) to an officers' committee for detailed examination.

The committee has been tasked with studying the legal and procedural mechanics to prevent arbitrary credit reversals while maintaining safeguards against fraudulent tax evasion networks. The panel will submit its findings within three months, following which the GST Council will convene an immediate session to review the report and finalize implementation timelines.