GST Challenges: Unjustified ITC Denial for Genuine Taxpayers

by R. Muthukumaran

Introduction

The Goods and Services Tax (GST) was introduced in India with the aim of simplifying indirect taxation, ensuring seamless credit flow, and reducing tax evasion. However, despite its objectives, genuine taxpayers often find themselves trapped in unnecessary legal and financial complications. The GST system, instead of protecting honest businesses, sometimes places undue burdens on taxpayers who have followed all legal requirements.

This article is based on a real-life case of an honest taxpayer, Raam, who has been unfairly targeted by the tax department due to alleged discrepancies in his supplier’s business operations. Despite complying with all GST laws, Raam is now facing financial losses and legal struggles, including denial of Input Tax Credit (ITC) and harassment from the department.

Case Background: A Genuine Taxpayer’s Ordeal

Raam is a law-abiding businessman who has diligently complied with GST regulations since its implementation. He has been filing his GST returns regularly, discharging his tax liabilities on time, and ensuring all statutory obligations are met. His business involves purchasing goods from a supplier, Laxmanan, whose godown is located just 10 km from Raam’s factory. The transportation of goods does not involve any toll gate or additional documentation requirements.

For the past seven years (FY 2018-19 to 2024-25), Raam has been regularly purchasing goods from Laxmanan. The key aspects of these transactions are as follows:

1. All invoices are valued below ₹10,000, meaning they are small-value transactions.
2. All payments have been made through banking channels, ensuring complete transparency.
3. All purchases have been properly recorded in GST returns, with tax amounts duly paid.

Despite this, Raam is now being penalized for no fault of his own.

Department’s Allegations and Notice under Section 74

Recently, the GST department conducted an inspection at Laxmanan’s premises and claimed that the place of business did not exist. Based on this finding, the department presumed that Laxmanan had engaged in fake billing.

As a result, the department issued notices under Section 74 of the CGST Act, 2017, to all recipients of Laxmanan, including Raam, alleging that they had engaged in fake purchases.

Raam, being a genuine recipient, was shocked to receive this notice, as he had:

• (i)  Valid tax invoices for all purchases.
• (ii) Paid for all goods through banking channels.
• (iii) Duly reported all transactions in GST returns.

However, despite following all legal procedures, Raam was asked to provide proof of movement of goods, including:

A.  Toll gate receipts (despite no toll gate on the route).

B.  Video footage of goods movement from seven years ago (FY 2018-19 to 2024-25).

These demands are completely unreasonable, Moreover, no business can be expected to preserve video evidence from past transactions, especially when the law does not mandate such a requirement.

Legal Framework for Input Tax Credit (ITC) – Rule 36 of CGST Rules

Under Rule 36 of the CGST Rules, 2017, ITC can be legally availed if the following conditions are met:

1. The taxpayer has a valid tax invoice as per Section 31 of the CGST Act.
2. The tax liability has been discharged as per Clause (f) of sub-section (3) of Section 31.
3. The relevant invoice details have been furnished in Form GSTR-2.
4. ITC shall not be availed in cases where tax has been paid under Section 74.
5. ITC can only be claimed if the supplier has reported the invoice in GSTR-1.

In Raam’s case, he has complied with all these legal conditions:

✔ He possesses valid invoices for all purchases.
✔ He has paid the supplier through banking channels.
✔ His transactions were properly reported in GST returns.

Despite fulfilling all statutory requirements, the department is demanding additional proof that is practically impossible to provide.

Unfair Burden on Honest Taxpayers

The department’s actions in this case are highly unreasonable. They are placing an excessive burden on the recipient, even though the supplier’s compliance is beyond the recipient’s control. This approach violates the fundamental principles of natural justice, where a person should not be penalized for someone else’s actions.

Even though Raam has maintained all necessary documents, inward registers, and stock records, proving that he received the goods physically, the department refuses to accept these documents and is demanding impossible forms of evidence.

Such arbitrary demands are causing unnecessary hardship to honest taxpayers. Instead of focusing on genuine cases of tax evasion, the tax authorities are targeting compliant businesses and forcing them to undergo lengthy and costly litigation.

Blocked ITC for 7 Years Under Section 86A – A Financial Nightmare

One of the most serious issues arising from this case is that the department has blocked Raam’s ITC under Section 86A for all seven years (2018-19 to 2024-25), amounting to ₹2 lakhs.

Consequences of ITC Blocking:

1. Raam is unable to claim credit for taxes he has already paid.
2. This has created a direct financial burden on his business.
3. Cash flow has been severely impacted.
4. He is facing a financial crisis due to an issue beyond his control.

Blocking ITC in a single slot for seven years has caused significant financial distress to Raam. Even though he has already paid GST to his supplier, he is now being denied credit for the same amount, effectively resulting in double taxation.

This not only defeats the purpose of GST but also discourages compliance among honest businesses.

The Harsh Reality – Who Suffers?

Raam’s case is not an isolated incident. Many taxpayers across India face similar challenges due to supplier-related investigations. Instead of focusing on real cases of fraud, the department is penalizing genuine businesses, forcing them to fight costly legal battles.

Larger Implications of Such Departmental Actions:

• A.  Even with proper invoices and bank payments, ITC can be denied.
• B.  Taxpayers are being asked to produce evidence that is practically impossible to provide.
• C.  A single supplier’s alleged default is leading to financial hardship for multiple businesses.
• D.  Blocked ITC is creating severe cash flow problems and disrupting business operations.

Conclusion

Raam’s case is a true example of how GST compliance alone does not protect honest taxpayers from harassment. Instead of strengthening enforcement against actual tax evaders, the system is burdening genuine businesses with unjustified demands, procedural hurdles, and financial losses.

This incident raises a critical question—is GST truly helping businesses, or has it become an additional burden for honest taxpayers?

Unless such issues are addressed, genuine taxpayers will continue to suffer. The GST framework must be implemented fairly to ensure that honest businesses are protected, rather than penalized, due to supplier defaults.

This article is a part of Article Writing Competition 2025.