Supreme Court GST Ruling: No ITC If Supplier Doesn't Pay Tax
The Supreme Court has upheld Section 16(2)(c) of the CGST Act, confirming that a buyer loses Input Tax Credit if the supplier never deposits the collected GST — even if the buyer acted in good faith. With FY 2022-23 demand notices due by 30 September 2026, businesses need to check their vendor compliance now.
CA Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Legal basis: Section 16(2)(c), Central Goods and Services Tax Act, 2017 — Effective: ongoing (in force since 1 July 2017; constitutional validity upheld by the Supreme Court on 24 July 2026). Source: https://taxguru.in/goods-and-service-tax/sc-upholds-section-16-2-supplier-tax-payment-condition-itc.html. Last reviewed by CA Harun Raaj: September 2026.
The Supreme Court has settled a question that has sat over every GST-registered business since 2017: if your supplier collects GST from you but never deposits it with the government, does your Input Tax Credit survive? In Bhandari Scrap Traders v. Union of India & Ors. (SLP(C) Nos. 23931/2026, decided 24 July 2026), the answer is a clear no. With demand notice deadlines for FY 2022-23 closing on 30 September 2026, this is not an academic ruling — it is a live exposure for anyone who claimed ITC on that year's purchases.
What the Supreme Court Decided
The Court upheld the constitutional validity of Section 16(2)(c) of the CGST Act, 2017, and held that actual payment of tax by the supplier to the government is a mandatory statutory condition for the recipient's entitlement to ITC. A buyer who genuinely purchased goods, paid consideration, and complied with their own GST obligations cannot retain ITC if the supplier failed to deposit the corresponding tax. The Court rejected the argument that an innocent or bona fide purchaser deserves protection from this condition — ITC, it held, is a statutory concession, not a vested right. It also confirmed that re-availment remains possible: under Sections 16 and 41 of the CGST Act, ITC that is reversed for this reason can be reclaimed once the supplier eventually discharges the liability.
The statutory language itself, under Section 16(2)(c), 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."
Key point: The Supreme Court has confirmed that ITC is denied if the supplier never actually pays the tax to the government, and a bona fide purchase does not override this condition under Section 16(2)(c) CGST Act.
Who Is Affected
This ruling touches every GST-registered business that claims ITC on purchases, including manufacturers and traders buying from multiple vendors in scrap, textiles, construction materials, or labour supply chains; service providers claiming ITC on input services from smaller vendors; MSMEs and exporters with limited visibility into whether their vendors are actually filing and paying GST; and any business that has relied on GSTR-2B appearance alone, without checking whether the supplier's GSTR-3B — and the payment behind it — was actually filed.
Where the Real Risk Sits
GSTR-2B reflects a supplier's GSTR-1 filing, not their GSTR-3B payment. An invoice can appear correctly in your GSTR-2B while the tax behind it was never deposited.
Practical Impact for FY 2022-23
A demand notice under Section 73 of the CGST Act (non-fraud cases) for FY 2022-23 must be issued by tax officers by 30 September 2026 — days from now. If your FY 2022-23 purchases include vendors who did not deposit tax, expect notices imminently. Once raised, a demand carries interest at 18% per annum under Section 50(3), running from the date the credit was originally availed.
Steps to Take Now
Run a vendor compliance check by pulling your GSTR-2B for FY 2022-23 and, for each high-value vendor, verifying on the GST portal whether GSTR-3B was actually filed and the liability paid. Flag credit from vendors who cancelled registration mid-year, switched to the composition scheme, or show a GSTR-1 filing with no matching GSTR-3B. Where the risk is clear, consider a proactive reversal in GSTR-3B Table 4B before a show cause notice is issued — this avoids the 18% interest exposure, and the credit remains reclaimable once the supplier eventually pays, under Rule 37A of the CGST Rules. For future purchase agreements, a GST indemnification clause requiring monthly proof of GSTR-3B filing can shift the commercial risk of supplier default back to the vendor. And where a notice has already landed, bona fide conduct — a genuine transaction, banking-channel payment, and reasonable vendor monitoring — will not prevent ITC denial on its own, but it remains a relevant factor in how the matter is presented and mitigated at the appellate stage.
Given the 30 September 2026 deadline for FY 2022-23 notices, a structured review of vendor-wise ITC exposure now is far less costly than responding to a demand after it is raised.
I'm CA Harun Raaj, Visakhapatnam.
If your FY 2022-23 ITC includes purchases from vendors you haven't verified for GST payment, reach out to our office before the 30 September 2026 notice deadline so we can review your exposure together.
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Frequently Asked Questions
I have genuine invoices and paid my vendor in full — why can I still lose ITC?
Section 16(2)(c) CGST Act imposes a statutory condition independent of the genuineness of your transaction: the tax must actually reach the government. If your supplier filed GSTR-1 but did not file GSTR-3B or pay the tax, this condition is unmet regardless of your good faith. The Supreme Court confirmed this in Bhandari Scrap Traders v. Union of India (24 July 2026).
Can I recover reversed ITC once my supplier eventually pays the tax?
Yes. Under Section 41 CGST Act read with Rule 37A CGST Rules, ITC reversed due to a supplier's non-payment can be re-availed once the supplier files GSTR-3B and deposits the tax. Until then, you bear the interest cost and working-capital impact of the reversal.
Is my FY 2022-23 ITC at immediate risk after this ruling?
Potentially. Tax officers must issue show cause notices for FY 2022-23 non-fraud ITC disputes under Section 73 CGST Act by 30 September 2026. If your FY 2022-23 GSTR-2B includes ITC from vendors who did not pay tax, expect demand notices around this deadline.
Does GSTR-2B appearing correctly guarantee my ITC is safe?
No. GSTR-2B reflects the supplier's GSTR-1 filing, not their GSTR-3B payment. It confirms the invoice exists in the supply chain, not that the tax has been deposited — and under Section 16(2)(c), it is the payment, not the invoice, that determines eligibility.
What is the difference between Section 16(4) and Section 16(2)(c) of the CGST Act?
These are separate, independent conditions. Section 16(4) sets a time limit for claiming ITC, while Section 16(2)(c) requires that the supplier has actually paid the tax to the government. Both conditions must be satisfied for ITC to be valid.
Can I avoid interest if I reverse the ITC myself before receiving a notice?
A voluntary reversal in GSTR-3B Table 4B before a show cause notice is issued is a way to limit the interest exposure under Section 50(3), which otherwise accrues at 18% per annum from the date of wrong availment. The credit remains reclaimable later under Rule 37A once the supplier pays.
Does being an innocent, bona fide buyer protect me from ITC denial?
No. The Supreme Court in Bhandari Scrap Traders explicitly rejected the argument that a bona fide purchaser should be protected from Section 16(2)(c), holding that ITC is a statutory concession, not a vested right. Bona fide conduct may still be relevant when responding to a notice, but it does not prevent denial.
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