The GST authority has reinforced a critical compliance principle: claiming input tax credit (ITC) is not automatic. You remain responsible for verifying that your suppliers are genuinely registered and remain in good standing.
In this order, a taxpayer was penalised for availing ITC on invoices from suppliers whose GST registrations were later cancelled from the beginning—meaning they were never legitimately registered at all.
What GST found
The authority found that the taxpayer had claimed ITC on invoices issued by suppliers whose GST registrations were subsequently cancelled ab initio (from inception). This means the suppliers were not validly registered when they issued the invoices. The recipient of the supply bears an obligation to verify the genuineness of the supply and the validity of the supplier's registration status.
Section 16(2)(aa) of the CGST Act, 2017 places strict conditions on when ITC can be claimed. The authority applied these limitations to deny the credit claimed on invoices from unregistered or invalidly registered suppliers, emphasizing that ITC is conditional on the supplier meeting all statutory requirements at the time of supply.
Following an SCN issued under Section 74 of the CGST Act and after providing a hearing opportunity, the authority confirmed the demand for reversed ITC, imposed interest under Section 50, and levied a penalty equal to 100% of the tax due—a significant enforcement outcome signalling strict treatment of this breach.
This order underscores that GST compliance is not passive. Businesses cannot simply accept supplier invoices at face value; you must proactively verify supplier GST registration status before claiming ITC. The 100% penalty (in addition to interest and demand reversal) reflects the seriousness with which the authority treats ITC claims on invalid supplies. At Vinayakam Consultants, we help our clients build robust supplier due diligence processes—from initial registration verification through periodic compliance audits—and maintain contemporaneous records demonstrating that verification. This protective approach not only shields you from demand and penalty but also strengthens your audit defensibility.
Your action checklist
- Maintain a documented supplier verification checklist: confirm GST registration number, check GSTIN validity on the official GST portal, and verify that the supplier's registration status is 'Active' before processing any invoice for ITC
- Conduct quarterly or bi-annual compliance audits of your top suppliers' GST registrations to catch any mid-period cancellations, status changes, or red flags that could invalidate ITC claims
- Retain evidence of your due diligence: keep copies of GSTIN verification reports, GST portal screenshots, and internal approval notes showing you verified supplier registration before claiming ITC
- Establish an internal control policy requiring authorization of ITC claims only on invoices from suppliers whose current GST registration status has been independently confirmed in writing
Frequently asked questions
No. If a supplier's GST registration is cancelled ab initio (from inception), you cannot claim ITC on their invoices. You are responsible for verifying supplier registration validity at the time of supply.
The GST authority can impose a penalty equal to 100% of the tax due, plus interest under Section 50, and demand reversal of the claimed ITC credit.
As the recipient of supply, you must proactively verify that suppliers are genuinely registered and remain in good standing at the time they issue invoices. This is not automatic and requires due diligence on your part.