Dealing with Non-Genuine Taxable Persons (NGTP) under GST

Introduction

Over the past two years, India’s GST ecosystem has witnessed an unprecedented surge in notices issued to taxpayers for their alleged dealings with Non-Genuine Taxable Persons (NGTPs). The CBIC’s two nationwide special drives against fake registrations — first in May–August 2023 and the second under Instruction No. 02/2024-GST dated 12th August 2024 (16 August to 15 October 2024) — have intensified scrutiny of suppliers and, by extension, their recipients. As a consequence, even genuine, tax-compliant businesses are today being asked to reverse Input Tax Credit (ITC) merely because their supplier has been tagged as fake or non-existent.

This article explains the concept of NGTP, the reasons for which notices are being issued, the recent judicial trend (including the latest Himachal Pradesh High Court ruling), and the practical steps a bona fide recipient should take to protect its ITC and its business.

1. What is a Non-Genuine Taxable Person (NGTP)?

An NGTP is a registered taxpayer who, on investigation, is found to be fake, fictitious or non-existent and whose registration has been used principally to issue invoices without actual supply of goods or services, in order to pass on fraudulent Input Tax Credit.

Typical fact patterns leading to an NGTP tag include:

• Fake registration — business does not exist at the registered address, or registration was obtained on forged documents.
• Bogus invoicing — invoices issued without underlying movement of goods or rendering of services.
• Non-filing of returns — GSTR-1 / GSTR-3B not filed for prolonged periods.
• Mismatch between GSTR-1 and GSTR-3B — outward supplies declared but corresponding tax not paid.
• Suspicious banking trail — circular transactions, immediate cash withdrawals, no genuine business expenses.

2. Why is the Department on the Offensive? — CBIC Instruction No. 02/2024-GST

To appreciate why notices are flooding in, one must understand the institutional backdrop. Through Instruction No. 02/2024-GST dated 12 August 2024, the CBIC directed all Central and State tax authorities to undertake a second All-India drive from 16 August 2024 to 15 October 2024 to weed out fake GSTINs. The salient features of the drive were:

The instruction expressly directs field officers to identify recipients (from GSTR-1 of the fake supplier) and to initiate demand and recovery proceedings against such recipients for the ITC availed. This is the legal trigger behind the wave of DRC-01A and DRC-01 notices that recipients are receiving today.

3. When Will a Recipient Receive an NGTP Notice?

Based on the patterns being observed across our practice, a bona fide recipient is exposed to notices in the following situations:

• The supplier has filed neither GSTR-1 nor GSTR-3B.
• The supplier has filed GSTR-1 (so credit appears in the recipient’s GSTR-2B) but has not filed GSTR-3B and not paid tax.
• The supplier has filed GSTR-1 and a NIL GSTR-3B.
• The supplier has filed GSTR-3B by claiming fake ITC of his own (which is not auto-populated in his GSTR-2A/2B) and used it to discharge his outward liability.
• E-way bill compliance is missing on transactions exceeding the prescribed threshold.
• The supplier is found non-existent on physical verification at his principal place of business.

In every one of the above situations, the Department issues a notice under Section 74 of the CGST Act demanding reversal of ITC along with interest and penalty, on the premise that the recipient has availed credit on which tax has not actually been paid to the Government.

4. Consequences of Being Linked to an NGTP

For the recipient, the fallout typically includes:

• Blocking of ITC in the Electronic Credit Ledger under Rule 86A.
• Show cause notice and demand under Section 74 of the CGST Act.
• Levy of interest under Section 50 and penalty equal to the tax under Section 74(1) / Section 122.
• Initiation of prosecution under Section 132 in serious or repeat cases.
• Provisional attachment of bank accounts and property under Section 83.
• Cross-flow of information to the Income Tax Department, often resulting in parallel proceedings under the Income-tax Act, 1961.

5. The Legal Question: Can ITC Be Denied Solely Because the Supplier Is Tagged as NGTP?

Section 16(2) of the CGST Act prescribes the conditions for availing ITC: possession of a valid tax invoice, actual receipt of goods or services, payment of tax by the supplier to the Government under clause (c), and filing of return by the recipient. Where the recipient has discharged each of these conditions in good faith, can his ITC be reversed merely because the supplier:

• is later found to be non-existent; or
• has failed to deposit the tax with the Government; or
• has had his registration cancelled retrospectively?

This question — which goes to the very heart of the GST credit chain — has now been answered, and answered firmly in favour of the bona fide recipient, by a series of recent High Court rulings, the most significant of which is the February 2026 decision of the Karnataka High Court in Instakart Services Pvt. Ltd.

6. The Landmark Ruling: Instakart Services Pvt. Ltd. v. Union of India

6.1 Citation and Background

Court: Karnataka High Court Case: Instakart Services Pvt. Ltd. v. Union of India & Ors. Writ Petition No. 4917 of 2021 Date of decision: 9 February 2026

The petitioner, a logistics service provider operating across multiple States and serving the e-commerce sector, was denied ITC by the Department on the ground that certain of its suppliers had failed to deposit the GST collected from the petitioner. There was no dispute that the transactions were genuine, that valid tax invoices had been issued, that the services had been received and that consideration along with tax had been paid through banking channels. The denial was based purely on a strict and literal reading of Section 16(2)(c) of the CGST Act, 2017 read with Rule 36(4) of the CGST Rules, 2017.

6.2 The Constitutional Challenge

The petitioner approached the High Court under Article 226 challenging the very validity of Section 16(2)(c) and Rule 36(4) on the following grounds:

• Article 14 (Equality): The provisions fail to distinguish between bona fide recipients and those involved in fraud or collusion, treating unequals as equals.
• Article 19(1)(g) (Right to Trade): They impose an unreasonable restriction on the right to carry on business by exposing the recipient to risks beyond his control.
• Article 265 (Authority of Law): Denial of ITC in such circumstances amounts to collection of tax without authority of law.
• Article 300A (Right to Property): ITC, once validly accrued, is the property of the taxpayer and cannot be taken away arbitrarily.

In the alternative, the petitioner sought that these provisions be read down to protect bona fide recipients who have complied with all conditions within their control.

6.3 Findings of the Court

After considering over 70 precedents, the Karnataka High Court held:

• A recipient who has fulfilled the conditions within his control — possession of a valid tax invoice, actual receipt of goods or services, and payment of consideration along with tax — has discharged his primary obligation under the GST law.
• Once the tax component has been paid to the supplier, the supplier holds it as an agent of the Government and is duty-bound to deposit it. The recipient has no statutory mechanism to verify or enforce such deposit.
• The law cannot compel a person to do the impossible. Expecting a recipient to monitor the supplier’s tax deposit is unreasonable and unworkable.
• ITC is a vested and indefeasible right in the hands of a bona fide recipient and cannot be denied for the default of an independent third party.
• Where the supplier has failed to deposit the tax, the proper course for the Department is to proceed against the defaulting supplier, not the recipient.

6.4 Application of the Doctrine of Reading Down

Rather than striking down Section 16(2)(c) as unconstitutional, the Court applied the doctrine of reading down. It held that Section 16(2)(c) and Rule 36(4) shall be read so as not to apply to a bona fide recipient who has complied with all other conditions of Section 16(2). The provisions can continue to be invoked, but only against recipients who are involved in fraud, collusion or wilful misstatement.

6.5 Operative Order

The Karnataka High Court disposed of the petition in terms of the Tripura High Court’s decision in Sahil Enterprises v. Union of India (W.P.(C) 688/2022 dated 6 January 2026) and the Gauhati High Court decision in National Plasto Moulding v. State of Assam (2024). Section 16(2)(c) and Rule 36(4) were read down so as to allow the benefit of ITC to bona fide recipients who have complied with all other conditions of Section 16(2), notwithstanding any default by the supplier in depositing tax.

6.6 Why This Ruling Matters

The Instakart decision is significant for several reasons:

• It is the first detailed reasoned ruling from the Karnataka High Court addressing the constitutional validity of Section 16(2)(c) under the GST regime.
• It directly addresses and follows the line taken by the Delhi High Court in On Quest Merchandising (affirmed by the Supreme Court in Arise India) and Shanti Kiran India, the Tripura High Court in Sahil Enterprises, and the Gauhati High Court in National Plasto Moulding.
• It provides a powerful precedent that can be relied upon across India in similar proceedings, particularly in NGTP cases where the recipient is being penalised for the supplier’s default.
• It crystallises the principle that the supplier collects GST as an agent of the Government, drawing on a line of Supreme Court rulings from the Sales Tax era.

7. The Earlier Landmark: Himalaya Communication Pvt. Ltd. v. Union of India

The Himachal Pradesh High Court in Himalaya Communication Pvt. Ltd. v. Union of India (CWP No. 8809 of 2025, decided 6 June 2025) had earlier dealt with a closely related issue. There, ITC had been denied solely on the ground that the supplier’s GST registration had been cancelled retrospectively. The Court held that:

• Retrospective cancellation of the supplier’s registration is not, by itself, a sufficient ground to deny ITC to the recipient.
• Before invoking Section 16(2), the Department is required to examine whether the underlying transaction was genuine.
• A mechanical exercise of denying ITC without verification of documents is unsustainable.

The impugned orders were set aside and the matter was remanded for fresh consideration.

Read together with Instakart, the Himalaya Communication ruling completes the picture: ITC cannot be denied to a bona fide recipient either because the supplier has failed to deposit the tax, or because the supplier’s registration has been retrospectively cancelled, without first examining the genuineness of the underlying transaction.

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8. Comparative Position of High Courts on Section 16(2)(c)

The judicial position across India is now sharply divided. The following table sets out the contrasting views:

8.1 High Courts that have READ DOWN Section 16(2)(c) in favour of the Bona Fide Recipient

8.2 High Courts that have UPHELD Section 16(2)(c) without Reading Down

8.3 Key Observation by the Karnataka HC on the Divergence

The Karnataka High Court in Instakart expressly noted that none of the High Courts which upheld the strict interpretation had been made aware of the Supreme Court’s affirmation of the Delhi HC view in Arise India and Shanti Kiran India. The Court further observed that the practical impossibility for a recipient to monitor the supplier’s tax deposit had not been considered by those Courts. On this basis, the Karnataka HC respectfully disagreed with their view and aligned itself with the line of authority that protects the bona fide recipient.

8.4 The Position before the Supreme Court

The Supreme Court has, on multiple occasions, declined to interfere with the High Court rulings that read down the provision in favour of bona fide recipients:

• SLP (C) No. 36750 of 2017 in Commissioner of Trade and Tax v. Arise India Ltd. — dismissed on 10 January 2018, affirming On Quest Merchandising.
• Commissioner of Trade and Tax, Delhi v. Shanti Kiran India Pvt. Ltd. — dismissed in 2025, again affirming the On Quest Merchandising line.
• The SLP against National Plasto Moulding was also reportedly dismissed by a non-speaking order.

While these are not full-fledged speaking judgments of the Supreme Court, the consistent dismissal of the Department’s appeals strongly suggests that the higher judiciary endorses the protective view in favour of bona fide recipients.

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9. The Concern at the Field Level: Where Is Natural Justice?

Despite this clear judicial guidance, the experience at the assessment stage tells a different story. In a typical NGTP matter today:

• ITC is first blocked under Rule 86A.
• DRC-01A is followed by DRC-01 in routine fashion.
• The recipient files detailed replies along with invoices, e-way bills, lorry receipts, weighbridge slips, bank statements and ledger confirmations.
• The replies are received but not discussed, not analysed and not addressed in the order.
• Officers cite “Commissioner’s instructions” or the special drive as the rationale for proceeding.
• A non-speaking order in DRC-07 is passed, almost invariably against the assessee.

This raises a fundamental legal concern. The Principle of Natural Justice — which is the cornerstone of every quasi-judicial proceeding — does not stop at issuing a notice and accepting a reply on the portal. It requires:

• Genuine consideration of the reply filed.
• Examination of the evidence placed on record.
• A reasoned and speaking order that engages with the assessee’s submissions and explains why they have been accepted or rejected.

Where these elements are missing, the order is liable to be set aside in appellate proceedings on the very ground of violation of natural justice — independent of the merits.

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10. The Practical Dilemma for the Taxpayer

A bona fide recipient who has fulfilled all conditions of Section 16 is today caught in a difficult position:

• Pay the tax with interest under protest to avoid coercive recovery, and then litigate?
• Or contest the demand at every stage — adjudication, first appeal, Tribunal, and if necessary, High Court?

Our experience suggests that, in most NGTP and Section 16(2)(c) matters, real relief is being secured only at the appellate or judicial level, not at the assessment stage. The good news is that, after Instakart, Himalaya Communication, Sahil Enterprises, National Plasto Moulding and the line of Supreme Court orders affirming On Quest Merchandising, the legal position is now clearly weighted in favour of the bona fide recipient. Taxpayers must be prepared for litigation but should also be confident that the law is on their side.

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11. The Way Forward: What Should a Recipient Do?

A. Preventive Steps (Before the Transaction)

1. Verify the supplier on the GST portal — check status, principal place of business, nature of business, return filing history and date of registration.
2. Conduct vendor due diligence for every new supplier — KYC documents, PAN, bank account, physical inspection where the value of dealings is significant.
3. Visit the registered place of business of new or unfamiliar suppliers, especially where transaction values are material.
4. Insist on proper documentation — tax invoice, e-way bill, lorry receipt, weighbridge slip, gate inward register entry, quality inspection report and proof of payment through banking channels.
5. Track the supplier’s GSTR-1 and GSTR-3B filing at the time of every claim of ITC.
6. Reconcile GSTR-2B with the books every month before utilising ITC.
7. Pay through banking channels only — never in cash, and preferably within 180 days as required under the second proviso to Section 16(2).

B. Curative Steps (After Receiving an NGTP or Section 16(2)(c) Notice)

1. Do not panic and do not pay under pressure. A demand based solely on the supplier’s NGTP status or non-payment of tax, without examination of the genuineness of the transaction, is now legally vulnerable in the light of Instakart and Himalaya Communication.
2. Compile a complete documentation file for each impugned transaction:
   • Tax invoice and e-way bill
   • Transport documents (LR, GR, weighbridge slip)
   • Gate inward / stock register entry
   • Quality / inspection report
   • Bank statement reflecting payment
   • Ledger confirmation of supplier
   • Subsequent use / sale / consumption of the goods
3. File a detailed and well-structured reply to the SCN, dealing point-by-point with the allegations and annexing all documentary evidence. Plead each ingredient of Section 16(2) and demonstrate compliance.
4. Place reliance on the leading judicial precedents, particularly:
   • Instakart Services Pvt. Ltd. v. UoI (Karnataka HC, 2026)
   • Himalaya Communication Pvt. Ltd. v. UoI (Himachal Pradesh HC, 2025)
   • Sahil Enterprises v. UoI (Tripura HC, 2026)
   • National Plasto Moulding v. State of Assam (Gauhati HC, 2024)
   • On Quest Merchandising India Pvt. Ltd. v. UoI (Delhi HC, 2017, affirmed by SC in Arise India, 2018)
   • Commissioner of Trade and Tax v. Shanti Kiran India Pvt. Ltd. (SC, 2025)
5. Insist on a personal hearing and ensure that submissions made during the hearing are reduced to writing and placed on record.
6. If the order is non-speaking and ignores the submissions, raise the ground of violation of the principles of natural justice in first appeal under Section 107 of the CGST Act.
7. Consider a writ petition before the jurisdictional High Court in cases where:
   • The order is wholly non-speaking.
   • The Adjudicating Authority has acted mechanically on instructions, without independent application of mind.
   • Coercive recovery has been initiated despite a stay application being pending.
   • There is gross violation of the principles of natural justice.
   • The matter falls squarely within the Instakart / Himalaya Communication line of precedent.

C. Long-Term Compliance Hygiene

• Build a vendor verification protocol as a standing internal control and document it in the company’s SOP.
• Conduct periodic vendor audits, especially for high-value or recurring suppliers.
• Maintain a supplier risk register classifying vendors as low / medium / high risk based on filing history, return discipline and physical verification.
• Train accounts and procurement teams on identifying red flags (newly registered vendors, no online presence, mismatch in invoice and PAN details, unusual delivery patterns).
• Engage your tax advisor at the first sign of a Rule 86A blocking rather than after DRC-07 is issued — early intervention dramatically improves outcomes.

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12. Concluding Thoughts

The fight against fake registrations and bogus ITC is necessary and welcome. No genuine taxpayer should suffer because a section of the trade has misused the GST framework to defraud the exchequer. At the same time, the law must distinguish — sharply and clearly — between the fraudster who manufactures invoices and the honest businessman who buys goods, pays tax, files returns and trusts the GSTIN issued by the Government itself.

The recent decision of the Hon’ble Karnataka High Court in Instakart Services Pvt. Ltd., read with the Himachal Pradesh High Court ruling in Himalaya Communication Pvt. Ltd., the Tripura High Court ruling in Sahil Enterprises, and the Gauhati High Court ruling in National Plasto Moulding — all of which trace their lineage to the Delhi High Court’s seminal decision in On Quest Merchandising India Pvt. Ltd. as affirmed by the Supreme Court in Arise India — together represent a powerful and growing line of authority. They reaffirm a principle that ought to have been self-evident: that ITC cannot be denied mechanically, that the genuineness of the transaction must be examined, that the supplier collects GST as an agent of the Government, and that the law cannot compel a person to do the impossible.

For the bona fide recipient, the message is clear. Build your documentation today, conduct your due diligence tomorrow, and if you are nonetheless caught in an NGTP or Section 16(2)(c) matter, do not surrender at the assessment stage. The law and the courts — increasingly so — are on the side of the honest taxpayer, provided the honest taxpayer is willing to assert his rights.

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This article has been prepared for general professional information and does not constitute legal or tax advice. Readers are advised to consult their tax advisor before acting on any of the views expressed herein. Citations should be independently verified before being relied upon in legal proceedings.

For queries and professional consultation on NGTP matters, ITC denial, GST adjudication and appeals, please reach out to the author.