How to Defend an Input Tax Credit Reversal Where Your Supplier Did Not Deposit the Tax
A notice proposing an input tax credit reversal because a supplier did not pay the tax over is answerable, but only on the documents. This guide sets out how to build that answer, in the order the steps arise, beginning with the question that decides which defence is available at all.
Step 1: Work Out What the Notice Actually Alleges
Three allegations travel under the same heading and they are not answered the same way. The first is simple non-payment by the supplier. The second is that the supplier's registration was cancelled, often with retrospective effect. The third is that the supply itself was a paper transaction in which the purchaser participated.
Only the third is an allegation against the client. Read the notice to see which it makes, and if it makes the third, identify the material said to support it. A reply that argues genuineness against a notice alleging only non-payment wastes the strongest ground, and a reply that argues non-payment against a notice alleging fraud misses the case.
Step 2: Fix the Statutory Condition Precisely
Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 makes credit available only where the tax charged in respect of the supply has been actually paid to the Government. The condition is real and has been upheld, so a reply built on the premise that the condition is bad will fail.
What the condition does not do is decide the enquiry by itself. The position after the Punjab and Haryana High Court's judgment of October 1, 2026 in Shaurya Alloys Pvt. Ltd. v. State of Punjab is that the provision cannot be invoked mechanically or in isolation merely because the supplier defaulted or its registration was later cancelled. The reply should be pitched at the application of the condition, not its validity.
Step 3: Assemble the Documents Before Drafting
Section 155 puts the burden on the person claiming the credit: where any person claims that he is eligible for input tax credit, the burden of proving such claim lies on him. So the file has to be built before the argument is written.
The categories the Court identified are the invoices, the transport documents, the electronic way bills, the stock records and the payment trail. Reconcile them against one another first, because an internal inconsistency found by the officer is worth more to the department than the mismatch it started with. Where a document is missing, say so and explain why rather than leaving the gap to be discovered.
Step 4: Characterise the Default and Ask What Was Done About It
The nature of the supplier's default is a relevant consideration: whether the tax was unpaid, partly paid, or paid late. If it was paid late, the credit question may have resolved itself and the reply should say so with dates.
Then ask, in terms, what recovery action the department took against the supplier. That is now a matter the officer is expected to consider, so a specific request for the information is legitimate and the absence of any answer is itself a point. A purchaser is not the department's first port of call simply because it is the easier one to find.
Step 5: Meet a Fraud Allegation on Its Own Terms
Where the notice alleges fraud, the material has to establish the purchaser's own participation or knowledge. Material that establishes only the supplier's misconduct does not carry across.
So the reply should separate the two expressly: what is alleged against the supplier, and what is alleged against the client. Then ask for the material behind the second. In many notices the answer is that there is none, and making that visible early is more effective than disputing the supplier's conduct, which the client usually cannot speak to.
Step 6: Raise Double Recovery Where It Applies
The same tax cannot be collected twice, from the supplier and again from the recipient, for the same default. Where the supplier has since paid, or is itself under demand for the same amount, that belongs in the reply with particulars and dates.
This is worth checking actively rather than waiting for it to emerge. The supplier's return filings and any departmental proceedings against it are the obvious places to look, and a client's own correspondence with the supplier often establishes the position faster than a formal request.
Step 7: Protect the Procedure
Natural justice here is substantive rather than formal. The adverse material relied on has to be disclosed and a real opportunity given to answer it. Section 75(4) of the Act requires an opportunity of personal hearing where one is requested in writing or where an adverse decision is contemplated.
So request the hearing in writing, and request the material in writing, and keep both requests on the record. An order that proceeds without disclosure or without the hearing is open to challenge on that ground by itself, which is a cleaner case than one that turns on contested documents.
Common Pitfalls to Avoid
Attacking the validity of the condition: It has been upheld. The available argument is that the officer applied it without making the enquiries it requires.
Treating the three allegations as one: Non-payment, retrospective cancellation and a paper transaction are different cases with different answers. Answer the one the notice makes.
Arguing before assembling: The burden of proving eligibility is on the claimant. Argument without the invoices, transport records, way bills, stock records and payment trail does not discharge it.
Ignoring what happened to the supplier: Whether the department pursued the defaulter is a relevant consideration, and silence on it is a point for the client rather than against.
Letting a fraud allegation stand unseparated: Material against the supplier is not material against the purchaser. Ask for the second, specifically.
Waiving the hearing by silence: Ask for the personal hearing in writing and keep the request on the file, so that an order passed without one is challengeable.
Key Statutory Provisions
Section 16 of the Central Goods and Services Tax Act, 2017: Eligibility and conditions for taking input tax credit, including the condition in sub-section (2)(c) that the tax charged in respect of the supply has been actually paid to the Government.
Section 155 of the Act: Where any person claims that he is eligible for input tax credit under the Act, the burden of proving such claim lies on that person.
Section 75 of the Act: General provisions relating to the determination of tax, including the requirement in sub-section (4) of an opportunity of personal hearing where it is requested in writing or where an adverse decision is contemplated.
Sources and References
Section 16(2)(c) after Shaurya Alloys: a shield against mechanical input tax credit reversal
High Court bars mechanical input tax credit reversal against genuine buyers
Section 75 of the CGST Act, 2017: general provisions relating to determination of tax
Central Goods and Services Tax Act, 2017, Sections 16, 155 and 75
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers should consult a qualified legal professional for advice specific to their circumstances.
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