Input Tax Credit begins as a benefit governed by statute. The more difficult question is whether, after the taxpayer has fulfilled every prescribed condition, the accrued credit can still be denied or withdrawn.
01
Introduction
The Input Tax Credit (ITC) mechanism is fundamental to the Goods and Services Tax framework. However, a claim to ITC is not absolute; it is subject to the conditions prescribed under the statutory provisions. This indicates that ITC is not an inherent right at its inception, but a concession or benefit granted to taxpayers within a defined legislative framework. The benefit may therefore be denied where the governing conditions are not met.
This raises two critical questions:
- Can an ITC claim be denied even after all statutory conditions have been fulfilled?
- Does ITC become a vested right once the taxpayer complies with the prescribed conditions?
Before answering these questions, it is necessary to examine the relevant statutory framework.
02
The statutory provisions
Sections 16, 17 and 18 of the Central Goods and Services Tax Act, 2017—and the corresponding State enactments—prescribe the eligibility requirements, conditions and restrictions for availing ITC.
Section 16 is the principal enabling provision. It recognises the entitlement of a registered person to take credit, subject to the conditions and restrictions prescribed by law. Section 16(2), operating notwithstanding Section 16(1), introduces additional requirements. Among other things, the claimant must:
- possess a valid tax invoice or other prescribed document;
- have received the relevant goods or services;
- satisfy the applicable tax-payment and return-filing requirements; and
- comply with the other restrictions contained in the statutory scheme.
Sections 16(3) and 16(4) impose further limitations, while Sections 17 and 18 regulate credit in specific circumstances and for particular categories of taxpayers. Thus, the law confers an initial entitlement but simultaneously qualifies it through positive conditions and express restrictions.
03
Is ITC a concession or a right?
The jurisprudence on the nature of credit has consistently treated ITC as a legislative benefit rather than an inherent right. This principle predates GST and was developed under the VAT, Modvat and Cenvat regimes.
In ALD Automotive Pvt. Ltd. v. CTO, the Supreme Court, while interpreting the Tamil Nadu VAT legislation, recognised ITC as a benefit created by statute and available only in accordance with the conditions expressly laid down by the legislature. A similar approach was taken in TVS Motor Company Ltd. v. State of Tamil Nadu, where the non-fulfilment of statutory documentary requirements resulted in reversal of credit.
Under the GST regime, BBA Infrastructure Ltd. v. Senior Joint Commissioner of State Tax similarly treated ITC as a conditional benefit governed by the statutory time limit in Section 16(4).
Therefore, at the stage of eligibility, ITC is not an unconditional or inherent right. The legislature may determine the extent of the benefit and the conditions governing its grant. The position changes, however, after the taxpayer has duly complied with those conditions and the credit has lawfully accrued.
04
Transformation into vested rights
Once the prescribed statutory requirements have been met, the accrued credit assumes the character of a vested right. A vested right belongs definitively to its holder and cannot be revoked or diminished except through the authority of law.
In Eicher Motors Ltd. v. Union of India, the Supreme Court considered the nature of Modvat credit and held that credit validly earned on inputs used in the manufacturing process constituted an accrued right that could not be taken away arbitrarily.
The principle was reinforced in Dai Ichi Karkaria Ltd. v. Union of India. Once credit accrued in accordance with the Modvat Rules, it was available for utilisation thereafter and became indefeasible in the absence of a lawful provision requiring reversal.
ITC may begin as a conditional statutory concession, but after lawful accrual it cannot be retrospectively or arbitrarily withdrawn.
05
Vested rights as a safety valve
Recognition of vested rights became particularly important during the transition from the pre-GST regime to GST. In Siddharth Enterprises v. Nodal Officer, the Gujarat High Court treated accumulated Cenvat credit as a vested right and property protected under Article 300A. The credit could not be invalidated merely because the prescribed transitional form could not be filed within time.
The same principle has protected genuine recipients where ITC was sought to be denied for a supplier's default. In Suncraft Energy (P.) Ltd. v. Assistant Commissioner, State Tax, the Calcutta High Court held that credit should not be reversed from a purchasing taxpayer who had fulfilled the requirements of Section 16(2), without first examining the defaulting supplier, except where circumstances such as collusion or the supplier being untraceable were established.
Cases considered
ALD Automotive Pvt. Ltd. v. CTO
ITC is a benefit created by statute and must be availed in accordance with the conditions prescribed by the legislature.
TVS Motor Company Ltd. v. State of Tamil Nadu
Non-fulfilment of the statutory requirements governing credit can justify reversal or rejection of the claim.
BBA Infrastructure Ltd. v. Senior Joint Commissioner of State Tax
The statutory time limit governing an ITC claim forms part of the conditional legislative scheme.
Eicher Motors Ltd. v. Union of India
Credit validly accrued on taxed inputs was recognised as a vested right that could not be taken away arbitrarily.
Dai Ichi Karkaria Ltd. v. Union of India
Once credit accrues in accordance with the applicable rules, it becomes indefeasible in the absence of a lawful provision requiring reversal.
Siddharth Enterprises v. Nodal Officer
Transitional credit was treated as a vested right and property protected under Article 300A, not to be defeated merely by procedural difficulty.
Suncraft Energy (P.) Ltd. v. Assistant Commissioner, State Tax
A purchasing taxpayer who has complied with the statutory requirements should not ordinarily suffer reversal solely for the supplier’s default without an appropriate enquiry.
06
Conclusion
GST was designed to reduce the cascading effect of indirect taxes and promote tax neutrality. A statutory framework may validly prescribe the conditions for earning ITC; however, once those conditions are fulfilled and the credit lawfully accrues, its arbitrary denial would undermine both the legislative design and the neutrality that GST seeks to achieve.
The better view is therefore that ITC is a concession at the stage of eligibility, but crystallises into a vested and indefeasible right after complete statutory compliance—subject, always, to a valid legislative provision authorising its denial or reversal.