You bought goods or services in good faith, verified the supplier on the portal, received a valid tax invoice, paid via bank transfer, and claimed input tax credit in Form GSTR-3B. Months or years later, during return scrutiny or audit, the proper officer alleges that your supplier GST registration was cancelled with retrospective effect, rendering your purchase invalid. Understanding statutory powers under Section 29(2) and the legal safeguards available to genuine buyers is essential to responding to such notices.
Statutory power to cancel registration retrospectively
Under Section 29(2), CGST Act, the proper officer has the power to cancel the registration of a person from such date, including any retrospective date, as he may deem fit. This power is exercised where a registered person contravenes provisions of the Act, fails to furnish returns for continuous prescribed periods, or obtains registration by means of fraud, wilful misstatement, or suppression of facts.
Before an order is passed, the proper officer must follow procedure under Rule 22(1) and Rule 22(2), CGST Rules by issuing a show-cause notice in Form GST REG-17 and allowing seven working days to reply. While the statute grants authority to cancel registrations retrospectively to curb fake invoicing, tax authorities frequently invoke this provision mechanically to disallow input tax credit in the hands of bona fide purchasing dealers.
Common mistake: Assuming that retrospective cancellation of a vendor automatically requires immediate reversal in your GSTR-3B. If the supplier was active on the invoice date and all conditions of Section 16(2) input tax credit conditions were fulfilled, the department cannot summarily disallow credit without proving collusion or absence of supply.
Judicial position on bona fide purchasing dealers
Various High Courts, including the Delhi High Court and Calcutta High Court, have repeatedly examined cases where the proper officer cancelled a supplier GSTIN retrospectively and subsequently initiated demand proceedings against the recipient under Section 73.
The established judicial view confirms that at the time of purchase, a buyer can only verify whether the vendor holds an active registration on the GST common portal. An ordinary buyer cannot foresee that a supplier might fail to file returns in subsequent years or face cancellation with retrospective effect. If the recipient proves the genuineness of the supply, proves receipt of goods or services, and proves actual payment including tax through regular banking channels, input tax credit cannot be denied solely due to subsequent retrospective cancellation of the supplier.
Notice risk: When tax officers issue an intimation or notice in Form DRC-01 or ASMT-10, they rely on Section 16(2)(c), CGST Act, which requires that tax charged has been paid to the Government. If the supplier registration is cancelled retrospectively, the officer treats the tax as unpaid. You must counter this by establishing the bona fide nature of your transaction with documentary evidence.
Documentary trail required to defend your credit
To establish that your inward supply was genuine and defend against notices under Section 73 or Section 61, you must assemble a comprehensive audit trail:
- Tax invoice: Original invoice complying with Rule 46, showing supplier GSTIN, invoice number, date, HSN, and tax breakdown under Section 16(2)(a).
- Proof of physical movement or receipt: E-way bills, lorry receipts (LR), weighing slips (weighbridge slips), delivery challans, or service completion certificates fulfilling Section 16(2)(b), CGST Act.
- Bank payment records: Bank account statements and payment vouchers showing payment made to the supplier within 180 days, covering both taxable value and GST.
- Return communication: Copies of Form GSTR-2B or GSTR-2A showing the invoice reported by the supplier under Section 16(2)(aa).
- Active status screenshot: Portal screenshot or search taxpayer records demonstrating the GSTIN was active on the date of transaction.
Worked example: responding to a Section 73 demand notice
Consider an engineering firm, Apex Precision Works, that purchased industrial tools from Prime Steel Corporation on 14 August 2023. At the time of purchase, Prime Steel Corporation held an active GST registration. In September 2026, the proper officer issued an intimation proposing reversal of credit because Prime Steel Corporation had its registration cancelled retrospectively from 1 July 2023.
| Document detail | Particulars | Amount | Status |
|---|---|---|---|
| Taxable value | Industrial cutting tools | ₹2,50,000 | Reflected in books |
| IGST (18%) | Charged on invoice INV-482 | ₹45,000 | Availed in GSTR-3B |
| Payment to supplier | RTGS through bank account | ₹2,95,000 | Paid within 180 days |
| Department demand | Tax plus interest under Section 50 | ₹45,000 | Disputed retrospective claim |
Apex Precision Works calculated interest under Section 50(3) at 18% per annum. For an alleged delay of 730 days on ₹45,000 of disputed tax, the calculated interest formula is: (₹45,000 × 18 × 730) / (100 × 365) = ₹16,200. Along with tax of ₹45,000, the officer demanded a total of ₹61,200.
Instead of conceding the demand, Apex Precision Works submitted a detailed reply supported by the original tax invoice, e-way bill showing physical movement, lorry receipt from the transporter, and bank ledger showing RTGS clearance of ₹2,95,000. Citing established judicial precedent that retrospective cancellation of a vendor cannot penalise a bona fide purchaser who verified active registration on the supply date, the taxpayer demonstrated full compliance with Section 16(2).
Frequently asked questions
Can the tax office deny input tax credit because a supplier registration was cancelled retrospectively?
The proper officer often issues notices under Section 73 citing retrospective cancellation under Section 29(2). However, where the purchase was genuine, the supplier was active on the date of transaction, tax was paid, and the buyer holds complete commercial evidence under Section 16(2), multiple High Courts have held that retrospective cancellation of the supplier cannot mechanically deny credit to a genuine purchasing dealer.
Which documents protect input tax credit against retrospective cancellation notices?
You must preserve the original tax invoice under Section 16(2)(a), proof of physical delivery or receipt of services under Section 16(2)(b), bank payment statements showing banking channel remittance under Section 16(2) second proviso, e-way bills, lorry receipts, and the GSTR-2B statement showing the invoice reflection under Section 16(2)(aa).
Reconcile and protect your input tax credit
Reconciling your purchase register with Form GSTR-2B monthly ensures you identify missing supplier filings, inactive registrations, and invoice mismatches before statutory deadlines pass. Your GSTR-2B and purchase register files are read in your browser and never uploaded to any server.
Last checked: 23 October 2026. Sources: CBIC Tax Information Portal Section 29, GST Portal User Manual on Form GSTR-3B.