Don’t Wait for Your Supplier to Pay GST: Take ITC, Reverse It, and Re-avail It When Tax Is Paid

Summary: The article examines the consequences of a supplier’s failure to deposit GST and the resulting exposure of a genuine recipient to input tax credit reversal and re-availment. It explains the interaction between Sections 16(2)(c), 16(2)(aa), 16(4) and 41(2) of the CGST Act and Rule 37A of the CGST Rules. A central concern is that a taxpayer who originally avails credit within the statutory time limit and subsequently reverses it may be able to reclaim that credit after the supplier complies, whereas a taxpayer who refrains from availing credit until the supplier pays may permanently lose the benefit because the original availment deadline has expired. The discussion considers the Supreme Court’s decision in Bhandari Scrap Traders v. Union of India and the Punjab and Haryana High Court’s subsequent judgment in Shaurya Alloys Pvt. Ltd. v. State of Punjab. While the former addresses the constitutional validity of Section 16(2)(c), the latter examines the safeguards and procedural requirements applicable when tax authorities seek to deny credit because of a supplier’s default. The article also identifies a practical difficulty: the GST portal does not provide the recipient with invoice-wise confirmation that the supplier has actually discharged the corresponding tax liability. Two illustrations demonstrate the distinction between timely availment followed by reversal and credit that was never availed before the deadline. The article explains the relevance of Rule 37A, GSTR-3B reporting, supplier compliance records, the Electronic Credit Reversal and Re-claimed Statement and documentary evidence. It also proposes a legislative amendment to protect otherwise eligible credit where supplier non-payment prevented timely availment. Practical recommendations cover supplier monitoring, reversal records, re-availment reconciliation, responses to departmental notices and preservation of supporting documents.

Don’t Wait for Your Supplier to Pay GST: Take the ITC, Reverse It, and Re-avail It When the Tax Is Paid – The anomaly between availment and re-availment that can cost an honest taxpayer the credit

1. Introduction

You paid your supplier the full invoice value, GST included. The invoice appears in your GSTR-2B and your returns were filed on time. Years later, a notice demands that you reverse the credit, with interest and penalty, because the supplier never deposited the tax. Under GST, the supplier’s default becomes your liability.

On 24 July 2026, the Supreme Court settled the question in Bhandari Scrap Traders: Section 16(2)(c) is valid, and being a bona fide buyer will not save the credit. There is a way back, because credit can be re-availed once the supplier pays. It works only for a taxpayer who availed the credit in time. A taxpayer who held back in good faith may find the credit lost for good under Section 16(4).

The relief has a second, deeper flaw. The proviso to Section 41(2) lets you re-avail the credit once the supplier pays, yet the law gives you no way to find out whether, or when, that payment is made. GSTR-2B shows only that the invoice was reported; nothing on the portal shows that tax on your invoice has actually reached the Government. By the time a notice arrives, the relationship with the supplier has usually soured, and the supplier is unwilling to share returns, ledgers or certificates. The right to re-avail exists on paper, but exercising it depends entirely on a supplier who no longer cooperates. The law offers no practical way to check whether the tax has been paid, so today the recipient has no option but to approach the supplier, whatever the state of that relationship. We hope the Government will recognise this gap in the procedure and provide a corrective mechanism. Until then, the question is how the credit can still be secured, and that, too, can only be done with the supplier’s help.

This article explains the difference between re-availment and fresh availment and works through two real-life scenarios. It also sets out the documents and strategy that protect your credit, and that defend it when the notice comes.

2. The Statutory Framework

Four provisions govern the issue: two conditions for availing credit, one obligation to reverse, and one machinery rule.

Provision	What it says	Effective from
Section 16(2)(c), CGST Act	ITC is available only if the tax charged has actually been paid to the Government by the supplier, in cash or through utilisation of the supplier’s own ITC	1.7.2017
Section 16(2)(aa)	The invoice must be furnished by the supplier in GSTR-1/IFF and communicated to the recipient (GSTR-2B)	1.1.2022
Section 41(2) (substituted by Finance Act 2022)	ITC on supplies where the supplier has not paid the tax must be reversed with interest; the proviso allows re-availment once the supplier pays	1.10.2022
Rule 37A, CGST Rules	If the supplier has not filed GSTR-3B by 30 September following the end of the FY, the recipient reverses the ITC by 30 November; it may be re-claimed after the supplier files	1.10.2023

The Finance Act 2022 also omitted Sections 42, 43 and 43A. These were meant to be an invoice-matching and communication system between supplier and recipient, but were never made operational. The reverse-and-reclaim model under Section 41(2) and Rule 37A replaced them.

Section 16(2)(aa) and Section 16(2)(c) are separate conditions. Departments often merge them in show cause notices. A reply should keep them distinct: invoice reporting is one question, actual payment of tax is another.

3. Constitutional Validity: Settled by Bhandari Scrap Traders

The Supreme Court has upheld Section 16(2)(c) and refused to read it down in favour of bona fide purchasers. Before that, High Courts were sharply divided.

Date	Case	Outcome
01.10.2026	Shaurya Alloys Pvt. Ltd. v. State of Punjab, CWP-34296-2024 and 423 connected petitions (P&H HC)	Provision upheld, but not to be applied mechanically; 14 guidelines laid down for officers before denying ITC for supplier default
24.07.2026	Bhandari Scrap Traders v. Union of India, SLP(C) No. 23931 of 2026 (SC)	SLPs dismissed; Gujarat HC affirmed. Section 16(2)(c) is valid and not to be read down
29.05.2026	Prime Metals v. CBIC, SLP(C) No. 18577 of 2026 (SC)	Validity not decided; taxpayer relegated to statutory appeal, issue left open
01.05.2026	Maruti Enterprise v. Union of India (Gujarat HC)	Provision upheld; reading down refused; Sahil Enterprises expressly disagreed with
06.01.2026	Sahil Enterprises v. Union of India (Tripura HC)	Provision upheld but read down, following On Quest Merchandising, to apply only to non-bona fide, collusive or fraudulent transactions

The Supreme Court’s key holdings in Bhandari Scrap Traders:

• ITC is a statutory benefit, not a vested or absolute right, so Parliament can attach conditions to it.
• The plea that credit should be denied only in cases of fraud or collusion was rejected.
• The Delhi VAT jurisprudence (Arise India, On Quest) cannot be carried over into the CGST framework.
• The Court relied on the scheme of Sections 41, 73 and 74, under which credit reversed for supplier default can be re-availed once the supplier pays.

The last holding matters in practice. The validity of the provision rests partly on the availability of re-availment. A demand confirmed after the supplier has paid would therefore run against the very scheme the Court relied on.

The earlier line of cases (Suncraft Energy, D.Y. Beathel Enterprises, Diya Agencies), which asked the department to proceed against the supplier first, is now significantly weakened. It remains useful only as support on burden of proof and natural justice.

Reading Shaurya Alloys With Bhandari Scrap Traders

The two rulings work at different levels. Bhandari settles that Section 16(2)(c) is valid and cannot be read down. Shaurya Alloys, decided after it, governs how the provision is applied, and lays down 14 guidelines that officers must follow before denying ITC for a supplier’s default. A supplier’s default, a departmental alert or a retrospective cancellation of the supplier’s registration can trigger an inquiry. None of these, by itself, justifies reversing the recipient’s ITC.

The judgment binds authorities in Punjab, Haryana and Chandigarh and is persuasive elsewhere. It does not create an unconditional right to ITC: the recipient must still establish eligibility under Section 155.

4. The Re-availment Mechanism

Credit reversed because the supplier did not pay can be taken back once the supplier pays. The legal basis is the proviso to Section 41(2), and Rule 37A provides the machinery.

The proviso to Section 41(2) allows the recipient to re-avail “the amount of credit reversed by him” once the supplier pays the tax on those supplies. The second proviso to Rule 37A allows re-availment in a later GSTR-3B once the supplier files GSTR-3B for that period. Neither provision sets a separate time limit for re-availment.

Five Steps in the ITC Reversal and Re-availment Cycle

The cycle runs in five steps:

Avail the credit in GSTR-3B within the Section 16(4) time limit, with the invoice reflected in GSTR-2B.

Identify default: the supplier has not paid the tax, or has not filed GSTR-3B by 30 September following the end of the FY (Rule 37A).

Reverse the credit in Table 4(B)(2) of GSTR-3B by 30 November, with interest under Section 50 where the credit was utilised.

Track the supplier’s payment or filing. The recipient has to do this itself; nothing in the law tells the recipient when it happens.

Re-avail in Table 4(A)(5) of a later GSTR-3B, and report the amount in Table 4(D)(1).

Reporting and Controls

• Circular 170/02/2022-GST sets out the table-wise reporting of reversal and re-claim in GSTR-3B.
• The portal’s Electronic Credit Reversal and Re-claimed Statement records the opening balance, reversals and re-claims, and flags a re-claim that exceeds the reversed balance.
• Interest paid on the reversal is not refunded on re-availment. The recipient’s real cost of supplier default is the interest for the intervening period.

Re-availment is not fresh availment. It restores credit that was originally availed within time, so the Section 16(4) deadline should not bar it. This point is not expressly settled by any ruling, but it follows from the wording of the proviso and from the reasoning in Bhandari Scrap Traders.

5. No Mechanism for the Recipient to Verify Payment

The GST law gives the recipient no way to confirm that the supplier has actually paid the tax on a particular invoice. The recipient is still held responsible for that payment.

The Punjab & Haryana High Court acknowledged this gap in Shaurya Alloys, the judgment that laid down 14 guidelines on denial of ITC for supplier default. It noted that the Act as enacted, through invoice matching, would have told the purchaser when a supplier defaulted. Without matching, a purchaser cannot ensure the supplier’s compliance. The Court’s reasoning is that a purchaser cannot be made a guarantor of the supplier.

Portal source	What it shows	What it does not show
GSTR-2A / 2B, IMS	The supplier reported the invoice in GSTR-1/IFF	Whether the tax on it was paid
Taxpayer search	Whether the supplier filed GSTR-3B for a period	Whether that return covered your invoice, or how the tax was paid
Rule 37A alerts	The supplier has not filed GSTR-3B	Actual payment
Credit reversal and re-claim statement	Your own reversals and re-claims	When the supplier pays

Three Further Gaps

• Tax is discharged in aggregate in GSTR-3B, not invoice by invoice.
• The department has no duty to tell the recipient when it recovers tax from the supplier.
• There is no automatic re-credit; the recipient has to track payment and re-claim on its own.

Using This Gap in Litigation

After Bhandari Scrap Traders, the absence of a mechanism is no longer a ground to strike down Section 16(2)(c). It is still relevant to the following:

• Burden of proof: the department must prove that tax was actually unpaid, not merely that a return was mismatched or filed late.
• Natural justice: the supplier-side data the department relies on (GSTR-3B, cash and credit ledger, status of recovery) should be disclosed to the recipient.
• Section 73 vs 74: a default by the supplier is not fraud or suppression by the recipient.
• Penalty: a recipient who could not have known of the default should not be penalised.

6. Illustration 1: Credit Availed, Supplier Pays After the Notice (FY 2020-21)

The notice should be dropped. The recipient has a strong case on the merits.

Facts. The recipient availed ITC in FY 2020-21. The supplier did not pay the tax. A notice is received in October 2026. The recipient follows up, and the supplier pays the tax with interest and files the pending return.

(a) Limitation

We assume the notice has first been checked to confirm it is within the limitation period under Section 73 or Section 74, as applicable.

(b) Merits: The Condition Is Now Satisfied

• For FY 2020-21 the governing provision is Section 16(2)(c) as it then stood. Section 41(2) as substituted (1.10.2022) and Rule 37A (1.10.2023) did not apply to that period.
• Section 16(2)(c) requires only that the tax has actually been paid. It sets no time limit for the supplier’s payment, so the condition is fulfilled once the supplier pays.
• Section 16(4) concerns when the recipient avails credit, and the recipient availed in time. The supplier’s later payment does not turn this into a fresh availment.
• Circular 193/05/2023 extends the procedure of Circular 183/15/2022 to the period 1.4.2019 to 31.12.2021, which covers FY 2020-21. The officer can accept a CA certificate where the difference exceeds ₹5 lakh, or a supplier’s certificate where it is ₹5 lakh or less.
• In Bhandari Scrap Traders, the Court upheld the provision on the footing that credit becomes available once the supplier pays. Confirming the demand now would collect the same tax twice.

(c) Interest and Penalty

• The supplier has already paid interest on the same tax, so the Revenue has been compensated.
• Interest under Section 50(3) arises only on ITC that is wrongly availed and utilised. The credit is no longer wrong.
• There is no loss of revenue and no suppression by the recipient, so penalty should not survive.

(d) Shaurya Alloys

Also test the notice against the 14 guidelines laid down by the Punjab & Haryana High Court in Shaurya Alloys. They bind authorities in Punjab, Haryana and Chandigarh and are persuasive elsewhere.

Risk to address in advance. If the supplier paid the tax by utilising ITC rather than cash, the department may question whether that ITC was valid. Obtain the supplier’s ledger showing how the tax was paid, and if possible a cash payment for the disputed amount.

Order of arguments in the reply: merits first (condition satisfied, Circular 193, Bhandari); then interest and penalty in the alternative.

7. Illustration 2: Credit Never Availed (FY 2022-23)

The credit cannot be taken now. It is lost, and two separate barriers stand in the way.

Facts. The recipient did not avail ITC for FY 2022-23 because the supplier had not deposited the tax. In November 2026 the supplier agrees to pay the tax and file the related return. The recipient wants to claim the ITC now.

Barrier 1: Section 16(4), the Deadline for Availing

• For FY 2022-23, ITC had to be availed by 30.11.2023, or the date of filing GSTR-9 if earlier. That date has passed.
• The credit was never availed, so claiming it now is a fresh availment after the deadline, whenever the supplier pays.
• Section 16(5), inserted retrospectively by the Finance Act 2024, relaxes the limit only for FY 2017-18 to 2020-21. Section 16(6) applies only where a registration is cancelled and later revoked. Neither helps.
• High Courts, including Calcutta, Patna, Kerala and Andhra Pradesh, have consistently upheld the validity of Section 16(4).

Barrier 2: The Supplier’s Returns Are Themselves Time-Barred

• Section 39(11), inserted by the Finance Act 2023 and enforced on the portal from 2025, bars filing a GSTR-3B after three years from its due date. Section 37(5) does the same for GSTR-1.
• The last GSTR-3B for FY 2022-23 (March 2023) was due on 20.04.2023, so it became barred after 20.04.2026. Every return for that year is now beyond the window.
• The supplier can therefore only pay through DRC-03. The invoice will not appear in GSTR-1 or GSTR-2B, so the Section 16(2)(aa) condition also fails.

Why this differs from Illustration 1. In Illustration 1 the credit had been availed, and the supplier’s payment cured the only defect. Here nothing was availed, so there is nothing to re-avail. The proviso to Section 41(2) and Rule 37A speak only of credit “reversed”. They cannot revive credit that was never taken.

What the Recipient Can Still Do

• Recover from the supplier. If the GST was paid to the supplier, claim compensation for it or adjust it against future payables. The supplier’s payment to the Government no longer benefits the recipient.
• If the GST portion has not yet been paid to the supplier, withhold it. The supplier’s own liability to the Government continues.
• Income tax treatment. Unavailable ITC becomes part of cost. It can be claimed as an expense, or capitalised where it relates to a capital asset, subject to the rules on the year of allowability.
• Writ petition only as a last resort. An argument that Section 16(4) cannot run while Section 16(2)(c) made the credit unavailable is principled. It has low prospects after Bhandari Scrap Traders and the High Court rulings upholding Section 16(4).

8. Re-availment vs Fresh Availment: The Anomaly

The law protects re-availment, not fresh availment. The result is that a recipient who avails and then reverses is protected, while one who never avails is not.

Situation	Can ITC be taken once the supplier pays?	Basis
Availed in time; demand raised; supplier pays later	Yes. The demand should fall	Section 16(2)(c) condition now satisfied
Availed in time; reversed; supplier pays later	Yes. Re-avail	Proviso to Section 41(2); Rule 37A
Never availed; Section 16(4) deadline passed	No	Fresh availment, time-barred under Section 16(4)

How the Trap Works

Section 16(2)(c) says the recipient is not entitled to ITC until the supplier pays. Section 16(4) cuts off the right to claim after 30 November of the following year, whether or not the supplier has paid. The law has no way to park the credit until the condition is met. A taxpayer who follows the spirit of Section 16(2)(c), and does not claim credit the supplier has not paid, ends up worse off than one who claims it and reverses it later. The law ends up penalising the cautious taxpayer.

The Fairness Argument

A limitation period should not run against a right the statute did not allow to be exercised. Until the supplier paid, Section 16(2)(c) disentitled the recipient, so the Section 16(4) clock arguably should not have started.

Precedent for Correction

Parliament has corrected this kind of harshness before. Section 16(5) was inserted retrospectively for FY 2017-18 to 2020-21 after sustained representations from trade and professional bodies.

Suggested Amendment

A proviso to Section 16(4) along these lines:

Provided that where input tax credit could not be availed within the period specified in this sub-section by reason only that the tax charged in respect of the supply had not been paid by the supplier, such credit may be availed within [180 days] from the date on which the supplier pays such tax, subject to the other conditions of this section.

9. Documentation Checklist for Re-availment

Keep a re-availment file for each supplier and period. It should prove every link in the chain: availed in time, reversed properly, supplier paid, re-claimed correctly.

This record matters more after Shaurya Alloys. Through its 14 guidelines, the Court protected genuine buyers from mechanical reversal, but left the burden of proving eligibility under Section 155 on the recipient. Contemporaneous evidence of purchase, payment, and movement and receipt of goods is what separates a protected buyer from one who loses the credit.

1. Original Availment (Section 16(4) Compliance)

• GSTR-3B of the month of original availment, with the Table 4(A) figure
• GSTR-2B of that period showing the invoice (Section 16(2)(aa))
• Purchase register and ITC ledger entry

2. Reversal

• GSTR-3B showing the reversal in Table 4(B)(2), with its date
• Proof of interest paid under Section 50 where the credit was utilised
• Electronic Credit Reversal and Re-claimed Statement showing the reversed balance
• Internal working of the reversal, invoice by invoice

3. Supplier’s Payment (the Trigger)

• The supplier’s GSTR-3B, or DRC-03, showing the tax paid
• Extract of the supplier’s cash or credit ledger, if obtainable
• Proof of interest paid by the supplier
• Supplier’s certificate or CA certificate confirming that tax on the specific invoices has been paid (CA certificate where the difference exceeds ₹5 lakh, per Circulars 183/193)
• Dated screenshot of the supplier’s GSTR-3B filing status from taxpayer search
• Correspondence with the supplier: follow-ups and confirmation

4. Re-claim Reporting

• GSTR-3B of re-availment, showing Table 4(A)(5) and Table 4(D)(1)
• Updated credit reversal statement showing the re-claim within the reversed balance
• Ledger entry for the re-availment

5. Genuineness of the Transaction

• Tax invoice
• Proof of receipt: e-way bill, delivery challan, transporter LR, GRN or stock entry; for services, the contract and proof of completion
• Bank proof of payment of invoice value plus GST to the supplier (second proviso to Section 16(2), 180-day condition)
• Purchase order, agreement or rate contract

6. Reconciliation (the Most Useful Single Document)

Invoice no.	Date	Taxable value (₹)	Tax (₹)	Month availed	Month reversed	Interest paid (₹)	Supplier payment date and mode	Month re-availed

Precautions

• Re-avail only after the supplier has actually filed or paid. A premature re-claim is a fresh error and attracts interest again.
• Keep the re-claim within the reversed balance; the portal flags any excess.
• Retain the file for the full Section 74 limitation period of the year in which credit is re-availed. Re-availment can be examined in the scrutiny of that later year as well.

10. Practical Recommendations and Conclusion

The single most important rule: avail the ITC within the Section 16(4) time limit, and reverse it if the supplier has not paid. That keeps the claim alive. Not availing at all risks losing the credit permanently.

For Recipients

Avail eligible ITC reflected in GSTR-2B within time, even where the supplier’s compliance is doubtful.

Monitor suppliers’ GSTR-3B filing status regularly, and reverse under Rule 37A where required.

Re-avail promptly once the supplier pays, and document the trigger.

Build contractual safeguards: withhold the GST portion until the supplier’s GSTR-3B is filed, include indemnity clauses, and run periodic compliance checks on suppliers.

For Notices on Supplier Default

Test limitation first, including whether invoking Section 74 is justified.

Obtain and file proof of the supplier’s payment, with the certificates required under Circulars 183/193.

Rely on Section 16(2)(c), the proviso to Section 41(2) and Bhandari Scrap Traders: once tax has reached the Government, there is nothing left to recover from the recipient.

Contest interest and penalty in the alternative.

Conclusion

Bhandari Scrap Traders has settled that a recipient’s credit depends on the supplier’s payment. It has also confirmed that credit returns when the supplier pays, but only for a taxpayer who availed it in time. Until Section 16(4) is amended, timely availment followed by reversal is the only way to protect the credit.

Cases Referred

• Shaurya Alloys Pvt. Ltd. v. State of Punjab, CWP-34296-2024 (O&M) and connected matters, Punjab & Haryana High Court, 01.10.2026 (14 guidelines on denial of ITC for supplier default)
• Bhandari Scrap Traders v. Union of India, SLP(C) No. 23931 of 2026, Supreme Court, decided 24.07.2026
• Prime Metals v. CBIC, SLP(C) No. 18577 of 2026, Supreme Court, order dated 29.05.2026
• Maruti Enterprise v. Union of India, Gujarat High Court, 01.05.2026
• Sahil Enterprises v. Union of India, Tripura High Court, 06.01.2026

******

About the Author

CA Vipin Jain, FCA, LLB, is a Partner at V. Rawal & Co., Chartered Accountants, New Delhi, and has been in practice since 2007. He advises on GST and indirect tax and represents clients before GST authorities and the GST Appellate Tribunal. He is a Special Invitee to the GST & Indirect Taxes Committee of NIRC-ICAI (2026-27). He can be reached at [email protected].

Disclaimer: The views expressed in this article are the personal views of the author. The article is for professional information only and does not constitute legal advice. Readers should verify the current legal position before acting on any specific matter.