GST in India: Navigating Double Taxation and Undue Enrichment Challenges

 

Introduction: Is GST Delivering Its Promise?

Since its launch on July 1, 2017, India’s Goods and Services Tax (GST) has been hailed as a game-changer for simplifying indirect taxation. By replacing multiple levies like central excise, service tax, and VAT with a unified destination-based tax, GST promised seamless input tax credit (ITC) and a fair, cascading-free system.

However, recent developments reveal a more complex reality. Accountants, tax professionals, and trade associations are flagging a systemic challenge: double taxation and undue enrichment of government revenue. Even compliant businesses are feeling the pinch when their suppliers default on GST filings or lose registration, leading to blocked ITC and cascading costs.

You might wonder—how can a tax system designed for fairness end up penalizing compliant businesses? Let’s unpack the issue with clear examples, legal insights, and practical solutions.

 

GST: A Quick Refresher

GST is built around a simple promise: tax paid on inputs can offset tax owed on outputs. This is what ITC is all about. When it works, businesses pay tax only on value addition, ensuring efficiency and fairness.

Two concepts are central to understanding recent disputes:

1. Undue Enrichment – The government cannot grant refunds or credits if the benefit rightfully belongs to another party. Sections 54(5) and 54(8) of the CGST Act safeguard this principle.
2. Double Taxation – GST should ideally be paid once along the supply chain. But ITC denial due to supplier non-compliance can force downstream buyers to effectively pay tax again.

Example:

• Manufacturer A remits GST on a batch of goods.
• Distributor B claims ITC.
• If Supplier C defaults or loses registration, tax authorities may block B’s ITC.
• Result? B pays GST twice, while the government benefits from unintended extra revenue.

A TaxGuru report highlights, “Forfeiture of entire ITC results in undue enrichment of the government and double taxation.”

This is not merely a technicality. Innocent businesses are losing money, supply chains are disrupted, and end consumers may face higher costs.

 

How Double Taxation and Undue Enrichment Happen

Understanding the mechanics is crucial. A typical scenario unfolds as follows:

1. Supplier compliance – Supplier A supplies goods/services and remits GST.
2. Downstream ITC claim – Buyer B claims ITC on the purchase.
3. Upstream default – Downstream suppliers or intermediaries fail to file returns or lose GST registration.
4. Blocked credit – Tax authorities deny ITC to B and may initiate recovery.

Key Consequences:

• Double Taxation: Tax paid upstream is effectively paid again downstream.
• Undue Enrichment: When ITC is denied on the full invoice rather than the value-added portion, the government collects more than fair tax.

Businesses argue that such technical defaults undermine GST’s goal of seamless credit. Thousands of companies, from SMEs to large manufacturers, are vulnerable—even when fully compliant.

 

Legal and Statutory Framework

Several legal provisions shape ITC eligibility and refund claims:

• Section 16(2)(c), CGST Act – Conditions under which ITC may be denied. Courts have referenced similar logic under Delhi VAT law: downstream buyers should not automatically bear supplier defaults.
• Section 54, CGST Act (Refunds) – Ensures refunds are only granted when no unjust advantage is passed to another party.
• Doctrine of Unjust Enrichment – While not explicitly named in the Act, courts recognize that taxpayers cannot retain benefits that belong elsewhere.

The challenge lies in distinguishing genuine supplier defaults from technical non-compliance, ensuring innocent buyers are not penalized.

 

Expert Insights: What Professionals Are Saying

According to senior chartered accountants:

“The GST system links downstream ITC eligibility to upstream compliance. While the law envisions seamless credit, practical risks expose bona fide buyers to financial loss.”

Judicial precedents indicate:

• ITC should reflect actual value addition.
• Downstream buyers should not be penalized for unrelated upstream defaults.

This guidance is crucial for businesses to navigate ITC risk without fearing automatic credit denial.

 

Ripple Effects Across Supply Chains

1. Buyers at Risk

Medium and large enterprises often bear the brunt. Blocked ITC increases costs, disrupts operations, and erodes competitiveness—even when they maintain perfect compliance.

2. Auditors and Tax Consultants

Professionals must track upstream compliance, verify supplier filings, and maintain meticulous documentation. The audit risk and client dissatisfaction are rising.

3. Consumers

Blocked ITC costs may eventually pass to end consumers, impacting affordability and market stability.

4. Revenue Authorities

Short-term tax gains from blocked credits may create long-term distrust in GST’s fairness. Sustained disputes could undermine the system’s credibility.

 

Practical Steps for Businesses

Businesses can mitigate these risks with proactive strategies:

1. Supplier Due Diligence – Verify GST registration, return filings, and tax remittance regularly.
2. Contractual Safeguards – Include ITC protection clauses, indemnities, and audit rights in contracts.
3. ITC Reconciliation – Continuously track ITC claimed versus supplier filings to avoid unexpected denials.
4. Cost Planning – Factor potential blocked credits into pricing and budgeting.
5. Documentation for Refunds – Maintain proof that tax burden was not shifted downstream.

Tip: Companies are increasingly adopting software solutions to automate supplier monitoring and ITC reconciliation. Real-time checks on GST portals can prevent costly surprises.

 

Common Misunderstandings

Misconception	Reality
ITC is automatically safe	No—downstream buyers risk credit denial if suppliers default.
Denial implies buyer fault	False—bona fide purchasers can still face blocked ITC.
Undue enrichment applies to all refunds	Only applies when tax burden shifts to another party.
GST prevents double taxation fully	Destination-based design helps, but blocked ITC can still cause double taxation.
Refunds over ₹2 lakh are denied	No—certification required, but refunds are processed if documentation is complete.

 

Strategic Considerations

1. Supplier Management – Strict onboarding policies and continuous compliance monitoring.
2. Regulatory Engagement – Engaging with tax authorities to clarify Section 16(2)(c) and reduce unwarranted ITC denial.
3. Industry Advocacy – Trade bodies pushing for guidance to align credit denial with actual value addition.

 

The Road Ahead: Policy and Reforms

Experts expect potential reforms from the GST Council and CBIC:

• Limiting ITC denial to value-added portions instead of full invoice amounts.
• Providing safeguards for bona fide buyers.
• Enhancing portal transparency and supplier monitoring.
• Judicial pronouncements favoring innocent purchasers.

For businesses, staying informed, revising contracts, and monitoring upstream compliance are essential steps to mitigate exposure in this evolving landscape.

 

Conclusion

GST’s promise of seamless credit is under stress due to supply-chain complexities and upstream defaults. Innocent buyers face blocked credits, businesses absorb unintended costs, and government revenue may exceed fair collection.

Addressing these challenges requires:

• Legal clarity – Explicit rules to distinguish genuine defaults from technical lapses.
• Strict supplier monitoring – Real-time compliance checks and due diligence.
• Practical safeguards – Contractual protection and ITC reconciliation processes.

At Manika TaxWise, we advise proactive businesses and taxpayers to stay informed, diversify compliance checks, and leverage expert guidance to navigate these GST pitfalls efficiently. Fair, predictable, and transparent GST practices benefit not just businesses, but the entire economy.

 

FAQs

Q1: What is ‘undue enrichment’ under GST?
A: A taxpayer should not receive a benefit, like refund or ITC, if it rightfully belongs to another. Proof is needed that tax incidence was not passed downstream.

Q2: How does double taxation occur?
A: When ITC is claimed but later denied due to supplier non-compliance, the buyer effectively pays GST twice on the same value.

Q3: Can documentation protect ITC?
A: It helps but does not guarantee safety if upstream suppliers fail to file returns or lose registration. Legal remedies may be needed.

Q4: What to do if ITC is denied?
A: Engage the supplier, document evidence, assess financial impact, consider legal remedies, and revise procurement policies.

Q5: What trends should businesses watch?
A: Judicial pronouncements favoring innocent buyers, portal-based monitoring, clarification of Section 16(2)(c), and revised refund rules.

 

References

1. TaxGuru – “Double Taxation and Undue Enrichment under GST” (Oct 2025)
2. ClearTax – “Unjust Enrichment under GST”
3. TaxTMI – “Unjust Enrichment for Refund”
4. IJL R – “Doctrine of Unjust Enrichment and Its Relevance to Input Tax”
5. TaxIndiaOnline – “Denial of Input Tax Credit Leads to Unjust Enrichment and Double Taxation”