Summary: The Supreme Court’s decision in Bhandari Scrap Traders v. Union of India & Ors., SLP(C) No. 23931 of 2026 and connected matters, has affirmed the Gujarat High Court’s refusal in Maruti Enterprise to strike down or read down Section 16(2)(c) of the CGST Act, which makes ITC conditional upon tax charged on the supply actually being paid to the Government. The controversy principally concerns bona fide recipients who have received genuine supplies and paid consideration including GST but whose suppliers subsequently fail to deposit the tax. The Supreme Court agreed with the distinction drawn between the GST framework and earlier Delhi VAT law and took note of the statutory mechanism involving Section 41 and the recovery provisions under Sections 73 and 74. Section 41 permits reversed credit to be re-availed once the supplier subsequently pays the relevant tax. The decision substantially strengthens the statutory supplier-payment condition and makes vendor compliance monitoring increasingly important for businesses. However, the practical policy debate continues. The possibility of legislative or administrative relief for genuine recipients remains significant, particularly if safeguards can distinguish bona fide transactions from fraudulent ITC claims. Consequently, although the constitutional challenge to Section 16(2)(c) has encountered a decisive Supreme Court ruling in Bhandari Scrap Traders, the future practical treatment of supplier-default cases may continue to evolve.
What does Section 16(2)(c) provide?
Section 16(2)(c) makes the availability of ITC subject to the condition that the tax charged in respect of the supply has actually been paid to the Government.
This raises an obvious practical question.
What happens when the recipient has genuinely purchased goods or services, paid the supplier including GST, and complied with its own obligations, but the supplier fails to discharge the tax to the Government?
The recipient generally has limited control over the supplier’s subsequent tax compliance. This has been one of the principal arguments raised against the operation of Section 16(2)(c).
The constitutional challenge
The challenge to Section 16(2)(c) was largely based on the argument that a bona fide recipient should not suffer because of a default committed by the supplier. The petitioners also relied on decisions under the erstwhile Delhi VAT regime, where courts had considered the consequences of a selling dealer’s default on the purchasing dealer. The Gujarat High Court, however, examined the GST framework independently and found material differences between the Delhi VAT legislation and the CGST Act. The Court also considered the wider statutory framework, including Section 41 and the provisions dealing with recovery of tax from the supplier.
What did the Supreme Court hold?
The Supreme Court agreed with the approach adopted by the Gujarat High Court. The Court noted that although an SLP had been entertained in relation to the Tripura High Court’s decision in Sahil Enterprises, the detailed analysis undertaken by the Gujarat High Court had not been undertaken in the same manner by the Tripura High Court. The Supreme Court also noted the differences between the Delhi VAT Act and the CGST Act and held that the two statutory regimes could not simply be equated.
More importantly, the Supreme Court agreed with the Gujarat High Court’s consideration of Section 41 and Sections 73 and 74 of the CGST Act. The Court recognised that the GST framework provides a mechanism under which ITC reversed by the recipient can subsequently be re-availed once the supplier discharges the relevant tax liability. On this basis, the Supreme Court held that there were no grounds to declare Section 16(2)(c) unconstitutional or to read down the provision. The Court expressly affirmed the Gujarat High Court’s judgment.
The importance of Section 41
Section 41 is particularly relevant when examining the practical consequences of the judgment. With effect from 1 October 2022, Section 41(2) provides for reversal of ITC where the tax payable on the relevant supplies has not been paid by the supplier, along with applicable interest, in the prescribed manner. At the same time, the proviso permits the registered person to re-avail the amount of credit reversed once the supplier makes payment of the tax. Therefore, Section 16(2)(c) cannot be viewed in isolation.
The statutory framework recognises supplier default and provides a mechanism for reversal and subsequent re-availment when the underlying tax is eventually discharged. This aspect was an important part of the reasoning supporting the constitutional validity of Section 16(2)(c).
What does the judgment mean for businesses?
The judgment makes it difficult to challenge Section 16(2)(c) merely on the ground that the recipient has acted bona fide while the supplier has defaulted. For businesses, this makes vendor due diligence and continuous monitoring of supplier compliance increasingly important. ITC reconciliation cannot be limited to matching purchase registers with GSTR-2B.
Businesses also need to consider the compliance profile of their vendors, particularly where significant amounts of ITC are involved. Contractual safeguards, vendor declarations, periodic reconciliations and appropriate escalation mechanisms can become important components of indirect tax risk management. At the same time, the statutory mechanism for re-availment remains relevant. A supplier’s subsequent payment of tax can have a direct bearing on the recipient’s ability to reclaim credit that was previously reversed.
But is the Supreme Court judgment really the final word?
This is where the discussion becomes particularly interesting. The Supreme Court has settled the constitutional question. Section 16(2)(c) has not been struck down and has not been read down to generally protect bona fide recipients from the consequences of supplier non-payment.
However, the Government can still consider a policy or legislative solution to address the practical difficulties faced by genuine recipients.
And this now appears to be more than merely an industry wish !
Recent reports indicate that the GST law committee has considered a proposal under which a buyer’s ITC could be protected where the supplier has failed to deposit the tax, provided specified conditions are satisfied.
The upcoming GST Council discussion
The upcoming GST Council meeting is expected to focus on process reforms, including issues relating to litigation and ITC. Recent reporting also indicates that the meeting is scheduled for 7 October 2026.
Against this backdrop, the discussion around Section 16(2)(c) becomes particularly relevant. If the Council ultimately recommends a mechanism providing relief to genuine recipients who can establish the genuineness of the transaction and payment to the supplier, it would be an interesting development coming shortly after the Supreme Court’s decision.
My takeaway
The Bhandari Scrap Traders decision provides clarity on the constitutional validity of Section 16(2)(c), but from a practical GST perspective, the more interesting question may now be what happens next.
The Supreme Court has confirmed that the existing statutory condition cannot simply be ignored because the recipient claims to be a bona fide purchaser. At the same time, there is a legitimate policy question around whether a genuine recipient should ultimately bear the economic consequence of a supplier’s tax default when the recipient has undertaken a genuine transaction, paid the supplier including GST and maintained appropriate documentation.
If the GST Council introduces a mechanism to address this concern while retaining safeguards against fraudulent ITC claims, it could bring a meaningful change to the practical application of Section 16(2)(c).
The Supreme Court may have settled the constitutional challenge, but it will be now interesting to see whether the GST Council now changes the practical landscape.
