No Input Tax Credit (ITC) If Your Supplier Doesn’t Pay Tax: What the Supreme Court (SC) Has Just Settled
Summary: The Article discusses the challenge to Section 16(2)(c) of the CGST Act, 2017, which makes Input Tax Credit (ITC) conditional upon the supplier depositing the tax with the Government. It states that M/s Bhandari Scrap Traders was denied ITC because its supplier had not paid the tax, despite the buyer possessing a valid invoice, receiving the goods, paying the supplier, and filing returns. After unsuccessful adjudication and appellate proceedings, the matter reached the Gujarat High Court through a writ petition led by Maruti Enterprise Vs Union of India & Ors., where taxpayers sought to have Section 16(2)(c) read down, relying on the Delhi High Court’s On Quest Merchandising India (P) Ltd. v. Government of NCT of Delhi [(2017) 87 taxmann.com 179 (Delhi)] decision under the Delhi VAT Act. The Gujarat High Court upheld the provision on 1 May 2026 while suggesting a real-time verification mechanism. In Bhandari Scrap Traders v. Union of India & Ors. (SLP (C) No. 23931 of 2026, decided 24 July 2026), the Supreme Court dismissed the petitions, agreed with the Gujarat High Court, held that Section 16(2)(c) is constitutionally valid and need not be read down, distinguished the GST regime from the VAT framework, referred to Sections 41, 73 and 74 of the CGST Act and Rule 37A, and reiterated that the Government should consider a real-time verification mechanism.
Introduction: A trader in Srinagar buys goods worth lakhs from a registered supplier, pays the full invoice amount including GST, receives a proper tax invoice, and files his returns on time. Months later, he receives a Show Cause Notice from the GST Department: he is advised to reverse Input Tax Credit (ITC) along with interest at the rate of 18%, because the supplier never deposited that tax with the Government. The trader did nothing wrong. He had no way of knowing his supplier would default. Yet the law holds him responsible. Is that fair? Can it even be constitutional?
This exact question travelled from an Assessing Officer’s desk all the way to the Supreme Court of India — and in July 2026, the Court gave its final word. Every taxpayer, tax consultant, and departmental officer dealing with GST needs to understand what was decided and why.
The provision at the heart of the dispute
Section 16(2)(c) of the CGST Act, 2017 lays down one of the conditions for claiming ITC: the tax charged on a supply must have actually been paid to the Government by the supplier — either in cash or through his own credit ledger — before the recipient (buyer) can claim Input Tax Credit for it. Simply holding a valid invoice, having received the goods, and having paid the supplier is not enough. If the supplier pockets the GST amount instead of depositing it with the Government, the buyer’s ITC is denied, even though the buyer paid in good faith.
For years, traders across the country argued this was grossly unfair — punishing an honest buyer for someone else’s default over which he has no control, since a buyer cannot see his supplier’s GSTR-3B filings or bank account.
How the case reached Supreme Court
The case that finally settled the matter began, as most GST disputes do, at the ground level. A registered taxpayer M/s Bhandari Scrap Traders, was denied ITC by the Assessing Authority purely on the ground that his supplier has not paid tax to the Government. The demand was confirmed at the adjudication stage, and the matter moved through appellate proceedings without relief.
Unable to get relief through Appellate Authority under Section 107, the taxpayer approached the Gujarat High Court by way of a writ petition, along with several similarly placed taxpayers (the lead case there was Maruti Enterprise Vs Union of India & Ors.). Before the High Court, the taxpayers argued that the other conditions of Section 16(2) — a valid invoice, receipt of goods, and payment to the supplier — already prove a transaction is genuine, and that Section 16(2)(c) should be “read down” to protect honest buyers, just as the Delhi High Court had once read down a similar provision under the Delhi VAT Act in the well-known ‘On Quest Merchandising’ case.
The Department argued that ITC is not a vested right but a statutory concession, available strictly on the conditions Parliament has laid down. It also pointed out that the buyer is not left without a remedy: under Section 41(2) of the CGST Act read with Rule 37A of the CGST Rules, once the defaulting supplier eventually pays the tax, the buyer can re-avail the credit that was earlier reversed.
On 1 May 2026, the Gujarat High Court ruled against the traders. It held that Section 16(2)(c) is neither unconstitutional nor liable to be read down, distinguishing the GST framework sharply from the old VAT law. At the same time, the Court urged the Government to build a real-time, technology-driven system to verify supplier tax payments and recover dues quickly from defaulters, so honest buyers are not left in limbo.
Aggrieved, the traders filed Special Leave Petitions before the Supreme Court. Interestingly, a separate High Court — the Tripura High Court, in Sahil Enterprises v. Union of India & Ors. [W.P.(C) No. 688 of 2022 dated January 06, 2026] — had taken the opposite view just months earlier, reading down the same provision to protect bona fide buyers. This created conflicting positions across the country, making the Supreme Court’s intervention necessary.
What the Supreme Court decided
In Bhandari Scrap Traders v. Union of India & Ors. (SLP (C) No. 23931 of 2026, decided 24 July 2026), a Bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva dismissed the batch of petitions. The Court expressed “complete and respectful agreement” with the Gujarat High Court’s reasoning, holding that:
– Section 16(2)(c) is constitutionally valid and does not need to be read down.
– The GST scheme is fundamentally different from the old VAT regime, so precedents protecting bona fide buyers under VAT law cannot simply be transplanted into GST.
– The buyer is not without recourse — Sections 41, 73 and 74 of the CGST Act allow the Department to recover tax from the defaulting supplier, and the buyer can re-avail reversed credit once that recovery happens.
– The Court reiterated that the Government should seriously consider a real-time verification mechanism so that honest purchasers are not repeatedly caught in this trap.
With this ruling, the position that had been read down in Tripura effectively stands overtaken, and the field is now settled in favour of strict compliance.
Why this matters
For taxpayers, the message is unambiguous: paying your supplier’s invoice in full, including GST, is not enough protection. Your credit depends on what your supplier does with that money afterward — something outside your direct control but very much within your ability to guard against. Regularly checking GSTR-2B before filing returns, dealing only with compliant and verified suppliers, and building indemnity or tax-withholding clauses into supply contracts are no longer optional good practices — they are now essential safeguards.
For tax officials, the judgment removes ambiguity in adjudication and appeal. Denial of ITC under Section 16(2)(c), where the supplier has not paid tax, now rests on firm constitutional footing and need not be second-guessed on read-down arguments raised by taxpayers. Equally, officers should be mindful of the correlative duty the law places on the Department — timely initiation of proceedings against defaulting suppliers under Sections 73/74, so that the reversal-and-re-availment mechanism under Rule 37A actually functions as the safety valve the Courts have relied upon to justify the provision.
For the system as a whole, the ruling reinforces that ITC is a statutory concession, not an unconditional entitlement — a principle the Supreme Court had earlier affirmed in State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd. [(2023) 18 SCC 809] . The real long-term fix, as both the Gujarat High Court and the Supreme Court have themselves suggested, lies with the Government: building the technological infrastructure for real-time, invoice-level verification of supplier tax payments, so that compliance failures by one party in the chain don’t become financial punishment for another.
Until that infrastructure arrives, vigilance on the buyer’s part remains the best protection available.
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The author is a JKAS Officer, presently posted as State Taxes Officer, Circle-C, Srinagar, writes on GST Compliance and can be reached at CircleCKashmir@gmail.com
