The Gujarat High Court has admitted a constitutional challenge to the second and third provisos to Section 16(2) of the GST Act, which mandate reversal of input tax credit (ITC) if payment to the supplier is not made within 180 days.

In Priya Blue Industries Pvt. Ltd. v. Union of India, the Court has issued notice to the Union and State authorities on a Special Civil Application questioning the vires of these provisos. The matter is listed before a Division Bench of Justices A.S. Supehia and Pranav Trivedi, with notice made returnable in December 2025.

This is not a final ruling. The Court has only agreed to examine whether the 180-day payment condition is consistent with the design of GST and constitutional protections.

Context: What Is Really Being Challenged?

The petition attacks the legality of forcing reversal of ITC with interest where the buyer does not pay the supplier within 180 days from the invoice date, even if:

  • the supply is genuine,

  • GST has already been paid by the supplier to the Government, and

  • the delay is purely a commercial credit decision or a genuine dispute.

The concern is that Section 16(2) – which sets conditions to avail ITC – is being stretched to penalise commercial arrangements and liquidity issues, rather than tax evasion.

The Gujarat HC will therefore examine whether these provisos go beyond what is reasonably required to safeguard revenue, and whether they disproportionately burden bona fide recipients in long-cycle or dispute-heavy industries.

Legal Framework: Section 16(2) and the 180-Day Rule

Core conditions under Section 16(2)

Section 16 of the CGST Act sets out eligibility and conditions for availing ITC. In simplified form, Section 16(2) requires that:

  1. The recipient holds a valid tax invoice or prescribed document.

  2. The recipient has received the goods or services.

  3. The invoice is reported by the supplier and reflected to the recipient (clause (aa), via GSTR-2B).

  4. The tax charged has been actually paid to the Government (clause (c)).

  5. The recipient has furnished the relevant return (clause (d)).

Only on satisfying these conditions can ITC be taken and retained.

Second and third provisos to Section 16(2)

The second proviso adds a payment-linked condition: if the recipient fails to pay the value of supply plus tax to the supplier within 180 days from the date of invoice (other than reverse charge supplies), an amount equal to the ITC already availed must be added back to the recipient’s output tax liability, along with interest under Section 50.

The third proviso allows the recipient to re-avail ITC when the outstanding amount is later paid to the supplier.

In effect, the law:

  • permits ITC upfront, even before payment to the supplier;

  • treats non-payment beyond 180 days as a temporary disqualification, enforced by reversal plus interest; and

  • restores ITC once payment is made.

Rule 37 – the machinery provision

Rule 37 of the CGST Rules operationalises this 180-day condition. It requires a registered person who has availed ITC but not paid the supplier within 180 days to reverse or pay an amount equal to the ITC, proportionate to the unpaid consideration, along with interest, in the GSTR-3B of the period immediately following the expiry of 180 days.

When payment is subsequently made, ITC can be re-availed, and the time-limit in Section 16(4) does not apply to such re-availment.

How Courts Have Read the 180-Day Proviso So Far

Delhi High Court – ITC can be availed first

In Sunny Jain v. Union of India, the Delhi High Court held that a taxpayer is entitled to avail ITC upfront even if payment to the supplier has not yet been made. The Court read the second and third provisos to Section 16(2), along with Rule 37, to mean that:

  • ITC can be claimed when other Section 16(2) conditions are satisfied.

  • If payment is not made within 180 days, the taxpayer must add an amount equal to the ITC to output tax with interest.

  • On making payment, the taxpayer can re-avail the ITC.

The Court also found that blocking ITC under Rule 86A merely for non-payment within 180 days, without any allegation of fraud or ineligible credit, was beyond the scope of that Rule.

Strict approach to other ITC conditions

On the other hand, courts have often taken a strict view of Section 16(2)(c) (tax must be “actually paid” to Government). The Madras High Court in Pinstar Automotive India Pvt. Ltd. v. Additional Commissioner held that conditions in Section 16 must be interpreted strictly to protect revenue, even where the recipient had paid the supplier but the supplier failed to remit tax.

Academic commentary has criticised this approach as harsh for bona fide buyers and has contrasted it with earlier jurisprudence under VAT and excise.

Pre-GST guidance – Arise India and similar cases

In DVAT context, the Delhi High Court in Arise India Ltd. v. Commissioner of Trade & Taxes read down a provision that denied ITC to a purchasing dealer if the selling dealer failed to deposit tax. The Court held such denial, in bona fide cases, to be arbitrary and violative of Articles 14 and 19(1)(g). The Supreme Court later dismissed the Revenue’s appeal, effectively affirming this view.

While Arise India dealt with seller non-payment (analogous to Section 16(2)(c)), its reasoning on “impossible conditions” and bona fide buyers is likely to be cited by taxpayers challenging restrictive ITC provisions, including the 180-day payment rule.

Why the 180-Day ITC Rule Is Controversial

Taxpayer and expert concerns around the second and third provisos centre on four themes:

Misalignment with commercial credit cycles:

Many sectors — infrastructure, real estate, large FMCG distribution chains, inter-company transactions — work with credit periods well beyond 180 days.

Requiring ITC reversal purely because credit terms exceed 180 days ignores market practice and contractual risk allocation.

Cash-flow and interest burden:

The rule forces a cash-flow hit: the buyer must pay tax (often through cash ledger) plus interest, even though GST on the same transaction has already gone to Government.

When payment is finally made, ITC can be reclaimed but the interest paid is a dead cost.

Heavy compliance and tracking:

Businesses must continuously monitor invoice-wise ageing and payment status to identify entries crossing 180 days, reverse ITC proportionately under Rule 37, and then track re-availment on later payment.

Questionable nexus with tax evasion:

Where the supplier has paid GST and the transaction is genuine, non-payment by the recipient affects the supplier’s commercial risk, not the tax department’s revenue.

Treating ordinary commercial delay as a trigger for ITC reversal arguably converts GST into an instrument for enforcing private contracts, rather than a tax on value addition.

These concerns underpin the constitutional challenge now before the Gujarat High Court.

What Businesses Should Do While the Challenge Is Pending

For now, the law remains fully operative. The Gujarat HC has not stayed the provisos; it has only agreed to examine their validity.

Taxpayers should therefore:

  1. Continue monitoring the 180-day condition – Maintain robust ageing reports of creditor balances and reconcile them with ITC ledgers.

  2. Apply Rule 37 carefully – Reverse ITC (or pay equivalent tax) proportionate to unpaid consideration, along with interest, and re-avail correctly once payment is made.

  3. Document commercial reasons – Where longer credit periods are contractually agreed, preserve contracts, board approvals, and correspondence. These records may be useful if courts eventually carve out relief for bona fide, well-documented arrangements.

  4. Evaluate litigation strategy – Businesses materially impacted by the 180-day rule may consider intervening or filing similar writs in their jurisdiction, after taking tailored legal advice.

Conclusion: A New Front in ITC Litigation

The Priya Blue Industries petition marks an important new front in GST litigation. After earlier challenges to Section 16(2)(c) and stringent matching conditions, the focus now shifts to whether payment-linked ITC reversal within 180 days is compatible with the constitutional promise of fairness and with the economic logic of GST.

Whatever the eventual outcome, the Gujarat High Court’s ruling is likely to influence national jurisprudence on ITC and could trigger legislative or policy adjustments. For now, businesses should comply meticulously, document commercial realities, and closely watch how this challenge unfolds.