A Brief Discussion on sections 16(2)(c), 41 of CGST Act 2017 & Rule 37A of CGST Rules 2017

Introduction

Input Tax Credit (ITC) is considered the backbone of the Goods and Services Tax (GST) framework enabling a seamless chain of tax credits, preventing the “cascading effect” (tax on tax). It allows registered taxpayer to reduce its final tax liability by the amount of tax (GST) already paid on purchases, and ensures tax is paid only on value addition. 

ITC is not granted but a conditional right subject to satisfaction of conditions laid by GST Act and Rules. Its entitlement is not automatic but requires strict compliance on the part of the registered taxpayer as well as the supplier.

The registered tax payer has been made dependent on the purchases from supplier, the ITC becomes invalid on account of non-payment of tax by the supplier. It has been a subject matter of intense judicial scrutiny. The GST law explicitly prohibits recipients from availing ITC on supplies for which taxes have not been remitted to the Government treasury.

Despite of years passing by since GST was enforced, the law lacked clarity on how registered taxpayer could verify whether their suppliers had indeed paid taxes to the Government treasury in a timely manner or not.

The web of ITC Sections 16(2)(c), 41 of CGST Act 2017 & Rule 37A of CGST Rules 2017

Under the GST law, a registered person is entitled to avail ITC, subject to:

• Section 16 which deals with the eligibility and conditions for taking input tax credit;
• Section 41 which deals with deals with availment of input tax credit;
• Rule 37A deals with reversal of input tax credit.

Section 16(2)(c), states that the registered tax payer cannot avail ITC if the tax charged by the supplier has not been paid to the Government, and is subject to the provisions contained in Section 41 which provides that ITC availed by a recipient is liable to be reversed along with applicable interest where the supplier has not paid the tax to the Government. Rule 37A prescribe the mechanism for reversal of ITC in the event of non-payment of tax by the supplier. Further, the registered tax payer can re-avail the ITC, if the supplier subsequently pays the tax.

Sections 16(2)(c), 41 of CGST Act 2017 & Rule 37A of CGST Rules 2017 [as amended prevailing on date]

Section 16 of CGST Act 2017 deals with the eligibility and conditions for taking input tax credit wherein its sub section (2)(c) lays down condition that the tax charged in respect of such supply has been actually paid to the Government either in cash or though ITC.

Section 16 (2) (c) “subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply”;

Section 41 [amended 01.10.2022] deals with availment of input tax credit prescribing the conditions:

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to avail the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited to his electronic credit ledger.

(2) The credit of input tax availed by a registered person under sub-section (1) in respect of such supplies of goods or services or both, the tax payable whereon has not been paid by the supplier, shall be reversed along with applicable interest, by the said person in such manner as may be prescribed:

Provided that where the said supplier makes payment of the tax payable in respect of the aforesaid supplies, the said registered person may re-avail the amount of credit reversed by him in such manner as may be prescribed.

Rule 37A [inserted 26.12.2022] deals with reversal of input tax credit in the case of non-payment of tax by the supplier and re-availment thereof-

Where  input  tax  credit  has  been  availed  by  a  registered  person  in  the  return  in FORM GSTR-3B for a tax period in respect of such invoice or debit note, the details of which have been  furnished  by  the  supplier  in  the  statement  of  outward  supplies  in FORM GSTR-1, as amended in FORM GSTR-1A if any, or  using  the invoice furnishing facility, but the return in FORM GSTR-3B for the tax period corresponding to the said  statement of outward supplies has not been furnished by such  supplier  till  the  30th day  of September following the end of financial year in which the input tax credit in respect of such invoice or debit note has been availed, the said amount of input tax credit shall be reversed by the said registered person, while furnishing  a return in FORM GSTR-3B on or before the 30th day of November following the end of such financial year:

Provided that where the said amount of input tax credit is not reversed by the registered person in a return in FORM GSTR-3B on or before the 30th day of November following the end of such financial year during which such input tax credit has been availed, such amount shall be payable by the said person along with interest thereon under section 50.

Provided further that where the said supplier subsequently furnishes the return in FORM GSTR-3B for the said tax period, the said registered person may re-avail the amount of such credit in the return in FORM GSTR-3B for a tax period thereafter.

Understanding the provisions in simple words

• Sec 16 (2) (c), a tax payer shall not be entitled to ITC unless, the supplier pays it to the Government;
• Sec 41, ITC can be availed, but to be reversed if supplier fails to pay tax,
• Sec 41, ITC may be re-availed once supplier pays,
• Rule 37A, tax payer availed ITC on basis of GSTR-1 (supplier reported invoice), but supplier not filed GSTR 3B, ITC to be reversed before GSTR 9 date (30^th Nov), otherwise pay interest @ 18%.
• Rule 37A, ITC may be re-availed after supplier files GSTR-3B.

Understanding the mechanism through example of monthly filers

Particulars	Time Line	Remarks
Date of Invoice	02 Jan 26
Good Received	05 Jan 26
GSTR 1 Filing date	11 Feb 26	Filed monthly or quarterly depending on turnover. Monthly filers (turnover > Rs. 5 crore) must file by the 11th of the following month.
GSTR 3B Filing date	20 Feb 26	Monthly filers must file by the 20th of the following month
ITC may be availed by	30 Nov 26	For FY 2025-26, ITC can be availed till 30th Nov 2026 (Date of filing of GSTR-9 annual return)

Consider, the above example supplier has not filed its return GSTR 3B

• The registered tax payer must reverse ITC by 30 Nov 26,
• If tax payer delays, it is liable to pay interest @ 18% per annum, (w.e.f. 01.12.2026 onwards),
• ITC reversed may be availed later once supplier files GSTR 3B

GST jeopardy and its examination by Court’s

In respect of ITC Sec 16 (2)(c) deals with eligibility, Sec 41 with availment and Rule 37A with reversal. On careful reading one can find that Rule 37A do not align with the Sections 16 (2)(c) and 41. Sec 16 (2)(c) requires reversal of ITC where supplier fails to pay tax to the Government whereas Sec 41 supplier fails to file GSTR 3B for particular tax period.

Sec 16 (2)(c) imposes onerous burden on the taxpayer of situation which are not in its control. The taxpayer has no control on the supplier and cannot compel it to pay taxes or file GSTR 3B. The Apex Court and High Court have considered Doctrine of Impossibility and Doctrine of Reading Down in similar provisions.

The constitutionality Section 16(2)(c) was challenged before the High Court who have held that, while Section 16(2)(c) of the Act have to is not unconstitutional per se, it must be read down. The provision should not be interpreted to deny ITC to a purchaser in a bona fide transaction. Its application must be restricted to transactions that are collusive, fraudulent, or otherwise not bona fide.

Some mile stone judgements of Courts

• Hon’ble Delhi High Court in “Quest Merchandising India Ltd. v. Government of NCT of Delhi W.P.(C) 6093/2017 & CM No.25293/2017 Order dated 26.10.2017”, as well as “Arise India Limited v. Commissioner of Trade and Taxes”, W.P.(C) 2106/2015 Order dated 26.10.2017 has examined the scope of Section 9 (2)(g) of Delhi Value Added Tax, 2004

• Hon’ble High Court of Gauhati in M/s National Plasto Moulding versus The State of Assam & Ors. [WP(C)/2863/2022 Judgment delivered dated 05.08.2024] confirmed the judgment of the Delhi High Court in the case of On Quest Merchandising India Private Limited -Vs- Government of NCT of Delhi & Ors. (supra) 

• Hon’ble Tripura High Court, in “Sahil Enterprises vs Union of India & Ors.” [(WP(C) No. 688 of 2022) Judgment dated 06 January 2026], as well as in “M/S Malaya Rub-Tech Industries versus The Union of India & Ors.” [WP(C) No.849 of 2022 Judgment dated 10.02.2026] has examined the constitutional validity and scope of Section 16(2)(c)

Conclusion

The honest tax payer is always there under scrutiny, the increasing digitalization of tax administration, has made it easier for authorities to identify discrepancies with to curb tax evasion, the high level of automation and data analytics is leading to situations where even compliant taxpayers receive notices, often requiring them to prove their honesty.

Honest taxpayers are being penalized by the non-compliance of others, the vendor fails to pay GST file returns, and the honest tax payer suffers.

The impractical misaligned sections with rules add to its tyranny, what is left honest taxpayers adopt procedures where you can prove to the maximum extent of your valid transaction.

In the end Courts are there to interpret ambiguous laws and apply them to specific disputes. While the legislature makes the law, the judiciary ensures that the law aligns with the constitution, making its interpretation crucial in determining the law’s true meaning.