SC Upholds Section 16(2)(c) Supplier-Tax Payment Condition for ITC

ITC Beyond the Invoice: Supreme Court Upholds Supplier-Tax Payment Condition under Section 16(2)(c)

Summary: The Supreme Court, in Bhandari Scrap Traders v. Union of India & Ors., SLP(C) Nos. 23931/2026 and connected matters, decided on 24 July 2026, upheld the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (“CGST Act”), affirming that actual payment of tax by the supplier is a statutory condition for the recipient’s entitlement to Input Tax Credit (“ITC”). The case concerned whether a bona fide recipient who had genuinely purchased the goods or services, paid the consideration and complied with its own obligations could retain ITC despite the supplier’s failure to discharge the corresponding tax liability. Rejecting the challenge to Section 16(2)(c), the Court held that the recipient’s bona fides cannot override an express statutory condition, while recognising that the GST framework permits subsequent re-availment of ITC once the supplier discharges the relevant tax liability.

Section 16(2)(c) Governs the Availability of ITC

Section 16 of the CGST Act establishes the framework governing entitlement to ITC, while Section 16(2) sets out the conditions that must be satisfied before such entitlement can be exercised. Section 16(2)(c), which was at the centre of the constitutional challenge, specifically requires that “the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply”. The provision is significant because it links the recipient’s entitlement to ITC not merely to its own conduct, the existence of a tax invoice or the genuineness of the transaction, but also to the actual discharge of the corresponding tax liability by the supplier. The controversy in Bhandari Scrap Traders therefore concerned whether Parliament could constitutionally make the recipient’s entitlement to ITC dependent upon a condition whose fulfilment may, in practice, rest upon the supplier.

The challenge assumed significance because a recipient may have limited control over whether the supplier ultimately deposits the tax with the Government. While payment of the consideration, including the tax component, may complete the recipient’s commercial obligation, the supplier remains responsible for discharging the corresponding tax liability under the GST legislation. The denial or reversal of ITC in such circumstances consequently raises a question of how the statutory and commercial risks arising from supplier default should be allocated between the parties. The Supreme Court, however, found no constitutional infirmity in Parliament making such payment a condition governing the recipient’s entitlement to ITC.

GST Framework Cannot Be Equated with the Delhi VAT Regime

An important aspect of the challenge concerned the earlier jurisprudence under the Delhi Value Added Tax Act, 2004 (“Delhi VAT Act”), under which the consequences of a supplier’s failure to discharge tax liability had been considered in the context of the purchasing dealer’s entitlement to input credit. The petitioners sought to rely upon that line of reasoning in support of the proposition that a bona fide purchasing dealer should not be deprived of credit merely because the supplier had failed to fulfil its corresponding tax obligation.

The Supreme Court, however, accepted the Gujarat High Court’s detailed analysis distinguishing the statutory framework under the Delhi VAT Act from that under the CGST Act. The Court observed:

“The distinction and differences between the provisions of the Delhi Value Added Tax Act, 2004, and the Central Goods and Services Tax Act, 2017, brought out by way of a detailed analysis from paragraph 42 onwards in the impugned judgment along with the scheme of availing Input Tax Credit (ITC) under the GST regime, as set out in paragraph 56 of the impugned judgment, clearly demonstrate that there is no possibility of drawing parity between the provisions of the two enactments, so as to treat a purchasing dealer under the CGST Act on par with a purported bonafide purchasing dealer under the Delhi VAT Act in relation to ITC, when the supplier-dealer fails to pay the requisite tax.”

The observation is important because it prevents the constitutional challenge to Section 16(2)(c) from being determined merely by analogy with an earlier indirect tax regime. Although both the Delhi VAT Act and the CGST Act contain mechanisms for input tax credit, the legal conditions governing that credit are products of their respective statutory schemes. The Supreme Court therefore approached the GST regime on its own terms and accepted that the conditions prescribed by Parliament under the CGST Act could not be displaced simply by importing principles developed under materially different legislation.

This distinction also assumes broader importance for GST jurisprudence. The transition from State VAT and other indirect taxes to the GST regime did not merely consolidate existing taxes under a new nomenclature; it created a distinct statutory architecture based upon a particular mechanism for taxation, reporting, credit, reconciliation and payment. Consequently, the interpretation of an ITC provision under an earlier statute cannot automatically determine the constitutional validity or interpretation of a corresponding provision under the CGST Act. The statutory comparison must necessarily account for the language, structure and remedial mechanisms contained within the respective enactments.

Supplier Default and the Statutory Mechanism for Re-availment of ITC

The Supreme Court’s reasoning was also informed by the statutory mechanisms available under the CGST Act for dealing with a supplier’s failure to discharge tax. The Court specifically referred to Section 41 as well as Sections 73 and 74, noting the Gujarat High Court’s conclusion that the purchasing dealer under the GST regime may be entitled to re-avail the reversed ITC after the supplier-dealer has been made to discharge the relevant tax liability.

The Court recorded:

“Further, the High Court of Gujarat has also referred to the provisions of Section 41 of the CGST Act and also Sections 73 and 74 thereof in the context of the purchasing dealer under the GST regime being entitled to re-avail the reversed ITC after the supplier-dealer is made to discharge the tax liability.”

The Supreme Court’s reference to Sections 41, 73 and 74 is significant because it demonstrates that Section 16(2)(c) was not examined as an isolated provision that necessarily results in an irreversible loss of ITC whenever a supplier defaults. Instead, the Court considered it as part of a broader statutory scheme under which the GST legislation provides mechanisms for determining and recovering tax that has not been paid or has been short-paid, including cases involving fraud, wilful misstatement or suppression of facts. Section 41 forms part of the framework governing the availment of ITC, while Sections 73 and 74 address the determination and recovery of the supplier’s unpaid tax liability. The Court also recognised that, once the supplier discharges the relevant liability, the recipient may, subject to the applicable statutory requirements, re-avail the corresponding ITC.

This aspect of the judgment is particularly relevant to the challenge that Section 16(2)(c) places a disproportionate burden on recipients for defaults attributable to their suppliers. The availability of a statutory mechanism to recover the unpaid tax from the supplier, coupled with the possibility of subsequent re-availment of ITC, formed part of the Court’s assessment of the provision within the wider GST framework. The consequence of supplier default, therefore, cannot be considered in isolation from the statutory mechanisms available to address the default and restore the recipient’s credit in accordance with law.

Bona Fide Purchasing Dealer and the Limits of the Defence

The question of bona fides lies at the heart of disputes concerning supplier default. A purchasing dealer may genuinely believe that its supplier is compliant, may have paid the full consideration including the tax component, may possess a valid invoice and may have received the goods or services in the ordinary course of business. If the supplier subsequently fails to pay the tax to the Government, the recipient may consequently find itself exposed to the loss or reversal of ITC despite having no obvious role in causing the supplier’s default.

The Supreme Court’s judgment makes clear, however, that the bona fide character of the recipient’s conduct cannot, by itself, displace an express statutory condition governing the entitlement to ITC. The Court did not treat the recipient’s bona fides as irrelevant to the factual circumstances of a dispute, but it rejected the proposition that such bona fides could create an entitlement to credit contrary to the conditions prescribed by Parliament. The legal entitlement to ITC must ultimately be tested against the statutory requirements contained in Section 16.

This distinction between the recipient’s conduct and the statutory conditions attached to ITC is central to understanding the decision. The fact that a purchaser has acted honestly may distinguish it from a participant in a fraudulent transaction, but it does not necessarily answer the separate question of whether every statutory condition for availing credit has been satisfied. Section 16(2)(c) expressly requires actual payment of the tax charged on the supply to the Government, and the Supreme Court has declined to convert the recipient’s bona fides into a judicially created exception to that requirement.

The Court was categorical in holding:

“In that view of the matter, the High Court was fully justified in holding that no grounds were made out to declare Section 16(2)(c) of the CGST Act as unconstitutional or read down the provisions thereof.”

The Court thereafter expressly endorsed the reasoning of the Gujarat High Court, stating:

“We find ourselves in complete and respectful agreement with the views expressed by the High Court of Gujarat and affirm and uphold the impugned judgment.”

The special leave petitions were consequently dismissed.

A Genuine Transaction Is Not Necessarily Synonymous with Eligible ITC

The decision reinforces an important distinction between the genuineness of a transaction and the statutory eligibility of the resulting ITC. In many ITC disputes, the recipient may rely upon the fact that the goods were actually supplied, consideration was paid, the invoice was issued and the transaction was undertaken in the ordinary course of business. While these circumstances may establish the existence and authenticity of the supply, they do not, by themselves, satisfy all the statutory conditions governing ITC. Section 16(1) creates the general entitlement to ITC, but that entitlement remains subject to the conditions prescribed under Section 16(2) and the other applicable provisions of the CGST Act. Accordingly, possession of a valid invoice or proof of a genuine transaction cannot independently confer an unconditional right to credit where the remaining statutory requirements, including the requirement under Section 16(2)(c) that the tax charged on the supply has actually been paid to the Government, have not been fulfilled.

This distinction is significant to understanding the nature of ITC under the GST regime. Although ITC is integral to the GST mechanism and is intended to prevent cascading by allowing credit for eligible input tax, the entitlement itself is statutory and consequently subject to the conditions prescribed by Parliament. The Supreme Court’s decision does not diminish the role of ITC in maintaining the credit chain; rather, it affirms that such credit can be availed only within the limits and conditions established by the statutory framework.

Conclusion

In sum, the Supreme Court’s decision in Bhandari Scrap Traders v. Union of India & Ors. affirms that actual payment of tax by the supplier is a constitutionally valid condition for the recipient’s entitlement to ITC under Section 16(2)(c) of the CGST Act, and that the recipient’s bona fides cannot override an express statutory requirement. The Court also emphasised that the GST framework must be interpreted on its own terms rather than by importing jurisprudence from the Delhi VAT regime. While a genuine transaction and valid invoice do not, by themselves, secure ITC where Section 16(2)(c) remains unsatisfied, the statutory mechanism for re-availment following the supplier’s subsequent payment prevents the consequence from necessarily being irreversible. The broader question of whether the risk of supplier default should ultimately be borne by an otherwise compliant recipient remains a matter for legislative, rather than judicial, intervention.