A concern has been raised this year by tax professionals and industry stakeholders across India in relation to the scrap industry. Enforcement against the scrap trade leans heavily on data analytics, and computer-flagged mismatches are turning into show cause notices, back-dated cancellations and demands under the fraud provision.

For anyone in the scrap chain, the practical risk is the same: a dealer can lose a registration for past years even a buyer who paid in full can be asked to return tax credit.

The Sections and Rule made

What a retrospective cancellation of registration is

Section 29(2) of the CGST Act lets the officer cancel a registration from "any retrospective date", for example where returns have not been filed, the Act or Rules have been broken, or the registration was obtained by fraud. Rule 21 of the CGST Rules adds specific grounds, such as not operating from the address registered as the business premises, or issuing invoices without actually supplying goods.

The safeguard is procedural. The officer must first send a show cause notice in form REG-17, and the dealer has seven working days to reply in form REG-18. No cancellation can happen without a hearing. And under Section 29(3), cancellation does not erase tax owed for earlier periods.

Why the buyer gets hurt

The Input Tax Credit is a conditional right and the buyer can only avail the ITC subject to fulfilment of conditions in section 16 of The CGST Act, 2017. Section 16(2). Followings are the conditions :

1. Recipient is in possession of a tax invoice
2. The supplier has reported the invoice(s) in his GSTR-1 which corresponding reflect in GSTR-2B of the buyer
3. Recipient has received the goods or services or both
4. The tax charged by supplier in respect of such supply has been actually paid to government either in cash or thorough utilisation of ITC admissible in respect of such supply.
5. Recipient has furnished the return under section 39 of the CGST Act, 2017

Under Section 16(2)(c) of the CGST Act, entitlement to input tax credit is subject to the prescribed conditions, including that the tax charged on the supply has been actually paid to the Government, along with fulfilment of the other statutory conditions such as receipt of the goods or services and reporting of the supply by the supplier.

Importantly, Section 16 does not provide that ITC, once validly availed upon fulfilment of the prescribed conditions, can subsequently be denied merely because the supplier’s GST registration is cancelled at a later date, including with retrospective effect. There is no express provision under Section 16 stipulating that a subsequent or retrospective cancellation of the supplier’s GST registration, by itself, would extinguish the recipient’s otherwise validly availed ITC.

What Delhi High Court decided

The Delhi High Court addressed this in Mukesh Kumar Singh v. Commissioner of Delhi GST [1]. It recorded the department's own position that customers lose their credit when a registration is cancelled retrospectively, and held that such a cancellation is justified only where those consequences are "intended and warranted". In that case, the court moved the cancellation date forward to the date of the show cause notice.

What the courts have said

Recover from the supplier first. In Suncraft Energy Pvt. Ltd. v. Assistant Commissioner, State Tax [2], the Calcutta High Court held that when a supplier fails to pay tax, the department should first proceed against the supplier. Reversing the buyer's credit is for exceptional cases, such as a missing supplier, a closed business or a supplier without assets. The Supreme Court dismissed the department's appeal [3], saying it was not inclined to interfere, and noted that the amount involved was small.

Fraud cannot be alleged by label alone. In Cart Infralog Ltd. v. Additional Commissioner, CGST [4], the Calcutta High Court held that a buyer's credit cannot be denied only because the supplier defaulted or invoices did not appear in the buyer's GSTR-2A, where no collusion is alleged. It added that Section 74 cannot be invoked just by using the words fraud or suppression without the facts behind them.

But the buyer must prove the deal was real. In State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd. [5], decided under the Karnataka VAT law that came before GST, the Supreme Court held that the buyer claiming credit must prove the goods physically moved and the purchase was genuine. Invoices and cheque payments alone were not enough.

Section 74 or Section 74A?

For periods up to FY 2023-24, fraud-related demands fall under Section 74: the penalty equals the tax, and the order must come within five years of the annual return's due date. From FY 2024-25, Section 74A covers all demands. The notice must be issued within 42 months of the annual return's due date and the order normally within 12 months after that. The penalty equals the tax where fraud is established, and is 10% of the tax or ₹10,000, whichever is higher, in other cases. Paying early reduces the fraud penalty to 15%, 25% or 50% of the tax depending on the stage, but whether to pay or contest should be decided with a professional.

Records that protect you

Buyers and recyclers are commonly advised to check each supplier's GSTIN status on the GST portal, claim credit only for invoices shown in their GSTR-2B, pay by bank, and keep proof that goods moved: e-way bills, weighbridge slips and transporter receipts.

Scrap dealers are advised to file every return on time, keep their declared place of business active and documented, and reply to any REG-17 notice within seven working days. If a cancellation order carries a back date, check whether the notice proposed that date with reasons, and consult a GST professional quickly, since remedies have time limits.

The bottom line

A back-dated cancellation needs notice, a hearing and a real reason, and courts have repeatedly told the department to pursue the defaulting supplier first. For honest dealers and buyers, the strongest defence is paperwork showing the scrap was real, moved and was paid for through a bank.

Case law cited

1. Mukesh Kumar Singh v. Commissioner of Delhi GST & Ors., Delhi High Court, W.P.(C) 5791/2024, decided 25 April 2024. Judgment text
2. Suncraft Energy Pvt. Ltd. & Anr. v. Assistant Commissioner, State Tax, Ballygunge Charge & Ors., Calcutta High Court, MAT 1218 of 2023, decided 2 August 2023. Judgment text
3. Assistant Commissioner of State Tax, Ballygunge Charge & Ors. v. Suncraft Energy Pvt. Ltd. & Ors., Supreme Court of India, SLP (C) Nos. 27827-27828/2023, order dated 14 December 2023. Order
4. M/s. Cart Infralog Ltd. & Anr. v. Additional Commissioner, HQ Anti-Evasion Unit, CGST & CX, Kolkata South Commissionerate & Ors., Calcutta High Court, WPA 16556 of 2025, decided 27 August 2026, 2026 TAXSCAN (HC) 1385. Case report
5. State of Karnataka v. M/s. Ecom Gill Coffee Trading Pvt. Ltd., Supreme Court of India, Civil Appeal No. 230 of 2023, decided 13 March 2023, 2023 INSC 212. Judgment text

Law referred

• CGST Act, 2017: Section 16, Section 29, Section 74, Section 74A
• CGST Rules, 2017: Rule 21, Rule 22

General information based on the CGST Act, the CGST Rules and the rulings above, as checked on 25 September 2026. Not legal or tax advice; for any notice or order, consult a chartered accountant or GST lawyer.