Input Tax Credit (ITC) represents the GST paid on inward supplies which can be set off against the GST payable on outward supplies. While the GST framework was introduced with the objective of ensuring a seamless flow of credit and avoiding cascading taxation, the practical operation of ITC has emerged as one of the most contentious aspects of GST law. Under the current statutory scheme, merely paying GST to the supplier and possessing a valid tax invoice does not automatically entitle a registered recipient to claim ITC. In recent years, a large number of taxpayers have faced denial of ITC despite having paid GST to their suppliers, thereby exposing a serious disconnect between commercial reality and statutory compliance.
The entitlement to Input Tax Credit under the CGST Act operates through an electronic invoice-matching and return-filing mechanism prescribed under Sections 37, 38 and 39 of the Act, read with the relevant Rules. In practice, the ITC claim process involves the following sequential compliance steps:
1. Issuance and Reporting of Tax Invoice by Supplier (Section 37 – GSTR-1): The registered supplier issues a tax invoice charging GST on the outward supply and reports the details of such outward supplies in Form GSTR-1. This includes invoice number, date, taxable value, applicable tax rate, tax amount, and GSTIN of the recipient. The correctness of this declaration forms the foundation of the ITC chain.
2. Auto-Population of Inward Supply Data in Recipient’s GSTR-2A / GSTR-2B (Section 38): Based on the supplier’s GSTR-1 filing, the invoice details are auto-populated in the recipient’s Form GSTR-2A (dynamic statement) and Form GSTR-2B (static monthly statement). The recipient verifies key particulars such as:
Invoice number and date,
b. GSTIN and legal name of the supplier,
c. Taxable value and tax amount, and
d. Nature of supply (eligible or restricted under Section 38).
=> Only invoices reflected in GSTR-2B are treated as prima facie eligible for ITC.
3. Reconciliation and Eligibility Verification by Recipient:
Prior to claiming ITC, the recipient is required to reconcile purchase registers with GSTR-2B and ensure compliance with statutory conditions under Section 16(2), namely:
a. possession of a valid tax invoice or debit note [Section 16(2)(a)],
b. receipt of goods or services [Section 16(2)(b)],
c. invoice not being restricted under Section 38 [Section 16(2)(ba)],
d. actual payment of tax to the Government by the supplier [Section 16(2)(c)], and
e. furnishing of return under Section 39 [Section 16(2)(d)].
4. Claim of ITC in Monthly Return (Section 39 – GSTR-3B):
The recipient thereafter files Form GSTR-3B declaring:
a. outward tax liability (output GST on supplies), and
b. eligible input tax credit (ITC as per GSTR-2B and Section 16 conditions).
The ITC is utilised for set-off against output tax liability in accordance with the utilisation hierarchy prescribed under the Act and Rules.
5. Statutory Linkage between ITC and Actual Tax Payment by Supplier (Section 16(2)(c)):
Notwithstanding reflection of invoices in GSTR-2B and compliance by the recipient, ITC remains statutorily contingent upon actual remittance of tax by the supplier to the Government. In cases where the supplier defaults in payment of tax, the department proceeds to deny ITC to the recipient on the ground of non-fulfilment of Section 16(2)(c).
Indian courts have increasingly adopted a buyer-protective approach in such cases and have repeatedly condemned the practice of denying ITC without first examining the conduct of the defaulting supplier. The Supreme Court in State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd. (2023) held that the purchasing dealer must establish the veracity of the transaction and the actual physical movement of goods, thereby emphasizing factual genuineness rather than mere procedural lapses of the supplier. The Delhi High Court in Commissioner, Trade and Tax v. Shanti Kiran India (P) Ltd. held that a purchaser cannot be penalised for the selling dealer’s failure to deposit tax where the transaction is bona fide. In Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi, the denial of ITC solely on account of the supplier’s default was held to be unsustainable. The Madras High Court in D.Y. Beathel Enterprises v. State Tax Officer strongly deprecated the practice of initiating proceedings only against the purchasing dealer without taking action against the defaulting supplier. Similarly, the Calcutta High Court in Suncraft Energy Ltd. and Lokenath Construction quashed demands raised against recipients in the absence of any investigation against the suppliers whose invoices were not reflected in GSTR-2A. The Patna High Court in M/s Aastha Enterprises v. State of Bihar, the Allahabad High Court in Trendships Online Services Pvt. Ltd. v. Commissioner, Commercial Taxes, U.P., and the Tripura High Court in Sahil Enterprises v. Union of India have also followed the same jurisprudential line, protecting bona fide purchasers and requiring the department to first proceed against the erring suppliers.
Despite these judicial pronouncements, the statutory framework under Section 16 remains unchanged. The Union Budget 2026 has not introduced any amendment to Section 16 of the CGST Act, nor has it altered the invoice matching mechanism, Rule 36(4), or the time limits for availing ITC. Consequently, although courts have repeatedly ruled in favour of bona fide recipients, the administrative application of Section 16(2)(c) continues to result in denial of ITC, compelling taxpayers to seek judicial intervention on a case-by-case basis.
Practical solutions: In this legal environment, buyers must adopt rigorous compliance and risk-mitigation strategies. They must maintain a complete documentary trail of transactions, including tax invoices, bank payment proofs, e-way bills, delivery challans and transport documents. They must establish both the genuineness of the transaction and the actual physical movement of goods in line with the principles laid down in Ecom Gill Coffee. Periodic reconciliation of purchase registers with GSTR-2A and GSTR-2B has become indispensable. Vendor due diligence must extend to monitoring the supplier’s filing status and GST registration validity. Contractual arrangements must incorporate indemnity clauses, withholding mechanisms linked to GST compliance, and audit rights over vendor GST filings in order to shift commercial risk back to the supplier.
In conclusion, the ITC framework under GST, though technologically driven, imposes a disproportionate burden on recipients by making their entitlement contingent upon the supplier’s tax compliance. Courts have attempted to restore balance by protecting bona fide purchasers and insisting that the department proceed first against defaulting suppliers. However, until legislative reform addresses the rigidity of Section 16(2)(c), ITC disputes will continue to dominate GST litigation. The present regime requires taxpayers to combine statutory compliance, documentary discipline and contractual safeguards to protect their substantive right to credit, thereby transforming ITC from a simple tax adjustment mechanism into a complex exercise in legal risk management.
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