P&H HC provides guidelines for invoking Section 16(2)(c) while upholding its constitutional validity

 This Tax Alert summarizes a recent ruling of the Punjab & Haryana High Court (HC) ^[1] on the constitutionality of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act), which imposes condition of supplier making payment of tax to the Government for eligibility of input tax credit (ITC) in the hands of recipient.

The key observations of the HC are:

• The condition under Section 16(2)(c), requiring actual payment of tax to the Government, is fundamental to the concept of ITC and is not constitutionally invalid merely because its application may cause hardship in individual cases.
• However, the said provision should not be read in isolation and must be applied harmoniously with the wider statutory framework with due regard for distinct legal positions for periods before 1 October 2022, from 1 October 2022 and from 26 December 2022.
• Retrospective cancellation of the supplier’s registration, reporting of nil or short tax liability by the supplier, or receipt of an alert against the supplier may constitute a starting point for inquiry, but these circumstances cannot, by themselves, justify denial of ITC in the hands of the recipient.
• While the burden of proving eligibility to ITC remains on the recipient under Section 155, it may be discharged by producing relevant records. The proper officer must consider and deal with such evidence in the adjudication order.

Basis above, HC disposed the writ petitions, by upholding the constitutional validity of Section 16(2)(c), while directing the proper officers to reconsider the pending proceedings in accordance with the guidelines laid down in the judgment.


Comments:

• The guidelines prescribed by the HC are likely to influence future adjudication of ITC denial cases across jurisdictions, especially those involving retrospective cancellation of supplier registrations and default scenarios.
• While the SC [2026-VIL-69-SC] has earlier upheld the constitutional validity of Section 16(2)(c), it did not examine the applicability of provisions across tax periods governed by materially different statutory frameworks.
• Similar challenge to the provision of section 16(2)(c) is also pending before the SC [SLP(C) No. 031573/2026] for the period prior to October 2022. Accordingly, the jurisprudence on these issues is still evolving, and taxpayers may closely monitor further judicial development.