Supreme Court Upholds Section 16(2)(c) of CGST Act: ITC at Risk Where Supplier Fails to Pay GST
Case: Bhandari Scrap Traders v. Union of India & Ors.
SLP(C) No.: 23931/2026 and connected matters
Court: Supreme Court of India
Order Date: 24 July 2026
Relevant Period: FY 2026-27 onwards
Introduction
The Supreme Court of India has delivered an important ruling on one of the most contentious issues under the GST law — whether a genuine purchaser can be denied Input Tax Credit (ITC merely because the supplier has failed to pay the corresponding GST to the Government.
In Bhandari Scrap Traders v. Union of India & Ors., the Supreme Court dismissed the Special Leave Petitions challenging the Gujarat High Court’s decision upholding the constitutional validity of Section 16(2)(c) of the CGST Act, 2017.
The Supreme Court agreed with the Gujarat High Court that there was no basis either to strike down Section 16(2)(c) or to read down its operation. (Indian Kanoon)
The decision has significant implications for businesses because it reinforces the importance of supplier-side GST compliance as part of the recipient’s ITC risk management.
What does Section 16(2)(c) provide?
Section 16(2)(c) of the CGST Act makes ITC subject to the condition that:
the tax charged in respect of the supply has been actually paid to the Government.
Therefore, merely possessing a tax invoice or paying the supplier does not, by itself, eliminate the statutory condition relating to payment of tax to the Government.
This is particularly important where a supplier:
issues a GST invoice;
reports the invoice in GSTR-1;
the invoice appears in the recipient’s GSTR-2B; but
fails to discharge the corresponding GST liability.
Background of the Case
The purchasing dealers challenged Section 16(2)(c), arguing that denial of ITC to a genuine purchaser merely because of the supplier’s default was unreasonable and unconstitutional.
The petitioners relied upon constitutional provisions including Articles 14, 19(1)(g), 265 and 300A and argued that the purchaser should not be penalised for an act that is primarily within the supplier’s control.
They also relied upon earlier judicial decisions concerning the Delhi VAT regime, particularly the treatment of bona fide purchasing dealers.
The Gujarat High Court rejected the challenge and upheld Section 16(2)(c). The matter subsequently reached the Supreme Court. (Indian Kanoon)
Supreme Court’s Decision
The Supreme Court dismissed the SLPs and affirmed the Gujarat High Court’s judgment.
The Court held that there was no ground to declare Section 16(2)(c) unconstitutional or to read down the provision.
Importantly, the Supreme Court agreed that the GST framework cannot simply be equated with the earlier Delhi VAT framework.
The Court observed that the Gujarat High Court had undertaken a detailed analysis of the GST mechanism and had correctly distinguished the provisions of the Delhi VAT Act from those of the CGST Act.
Accordingly, the protection available to bona fide purchasers under the earlier VAT jurisprudence could not automatically be extended to recipients under GST where the supplier had failed to pay the tax. (Indian Kanoon)
ITC is a Conditional Statutory Benefit
One of the most important takeaways from the judgment is the treatment of ITC as a statutory benefit subject to conditions prescribed under the GST legislation.
A recipient cannot claim ITC solely on the basis that:
the transaction is genuine;
payment has been made to the supplier;
the invoice is available;
the goods or services have been received; and
the invoice appears in GSTR-2B.
All statutory conditions must be satisfied.
Therefore, taxpayers need to move beyond a purely invoice-based approach to ITC compliance.
What happens when the Supplier subsequently pays the GST?
The Supreme Court also considered the statutory mechanism for reversal and subsequent re-availment of ITC.
Section 41 of the CGST Act provides a mechanism under which ITC may be reversed where the supplier has not paid the tax, with the recipient being permitted to re-avail the credit when the supplier subsequently makes payment of the tax, subject to the applicable statutory mechanism.
The Court specifically referred to the framework under Sections 41, 73 and 74 of the CGST Act while considering the consequences of supplier default. (Indian Kanoon)
Thus, the position is not necessarily that the recipient permanently loses the ITC in every case.
However, the recipient may face a period during which the credit is required to be reversed and working capital can consequently be affected.
Role of Rule 37A
Rule 37A of the CGST Rules, 2017 is particularly relevant.
Where the supplier has furnished the invoice details in GSTR-1/IFF but has not furnished the corresponding GSTR-3B up to 30 September following the end of the financial year in which the ITC was availed, the recipient is required to reverse the relevant ITC by 30 November following the end of that financial year.
If the recipient does not reverse the amount within the prescribed period, the amount becomes payable along with applicable interest under Section 50.
Where the supplier subsequently furnishes the relevant GSTR-3B, the recipient may re-avail the reversed ITC in a subsequent GSTR-3B. (Goods & Services Tax Council)
Illustration
Suppose:
Supplier issues invoice in FY 2026-27.
GST charged: ₹1,80,000.
Invoice is reflected in the recipient’s GSTR-2B.
Recipient avails ITC of ₹1,80,000.
Supplier fails to furnish the corresponding GSTR-3B by 30 September 2027.
In such circumstances, the recipient would need to examine the applicability of Rule 37A and reverse the relevant ITC by the prescribed deadline of 30 November 2027.
If the supplier subsequently files the relevant GSTR-3B, the recipient can re-avail the credit in accordance with Rule 37A.
Major Practical Impact on Businesses
The judgment makes supplier compliance an even more important component of GST risk management.
Businesses should consider implementing a Vendor GST Compliance Policy covering:
1. Supplier onboarding
Before onboarding significant vendors, businesses should verify:
GSTIN status;
nature of business;
registration details;
historical compliance;
bank details;
commercial credentials;
frequency of return filing; and
risk indicators, wherever legally available.
2. Monthly ITC reconciliation
The accounting team should reconcile:
Purchase Register → GSTR-2B → GSTR-1 → GSTR-3B / supplier compliance indicators
A mere GSTR-2B match should not be treated as an unconditional confirmation of ITC entitlement.
3. High-value supplier monitoring
Special monitoring should be undertaken for suppliers contributing substantial amounts of ITC.
A supplier-wise ageing/risk report can classify vendors into:
Low Risk
Medium Risk
High Risk
ITC Reversal Required
4. Vendor communication
Purchase and finance teams should communicate with suppliers where discrepancies arise.
For example, if invoices are appearing in GSTR-1 but the corresponding tax liability appears not to have been discharged, the recipient should seek clarification and appropriate corrective action.
5. Contractual safeguards
Large businesses may consider incorporating GST compliance clauses into vendor agreements.
Such clauses may address:
timely filing of GST returns;
reporting of invoices;
payment of GST;
indemnification for tax exposure, subject to legal enforceability;
cooperation during GST audits;
recovery mechanisms for losses arising from supplier default.
Impact on GST Audit and Annual Compliance
The judgment also has implications for internal GST controls and audit documentation.
Businesses should maintain evidence demonstrating:
purchase invoice;
receipt of goods/services;
payment to supplier;
GSTR-2B reconciliation;
supplier communication;
reconciliation of ITC;
Rule 37A review;
ITC reversals;
subsequent re-availment; and
management approval for disputed/high-risk credits.
The documentation becomes particularly important where the department subsequently questions ITC.
Impact on Financial Statements
Where ITC becomes doubtful because of supplier non-compliance, management should evaluate the accounting consequences.
Depending upon the facts, the issue may affect:
GST receivable/ITC balances;
working capital;
tax expense;
contingent liabilities;
provisions, where applicable; and
disclosures in financial statements.
The accounting treatment should be determined based on the applicable accounting framework, the specific facts and the probability of recovery/re-availment.
Does the Supreme Court Decision Mean Every Genuine Buyer Automatically Loses ITC?
No.
The judgment should not be understood to mean that every supplier mismatch automatically results in permanent loss of ITC.
The correct position is that the statutory condition under Section 16(2)(c) cannot be ignored merely because the purchaser claims to be a bona fide purchaser.
Where the statutory framework permits reversal and subsequent re-availment, the taxpayer should follow that mechanism.
The precise treatment will depend on:
nature of supplier default;
whether the supplier has filed GSTR-1;
whether GSTR-3B has been filed;
whether tax has actually been discharged;
applicability of Rule 37A;
period involved; and
other conditions under Section 16.
Key Takeaways
The Bhandari Scrap Traders decision sends a clear message to GST taxpayers:
1. Supplier compliance matters.
ITC cannot be evaluated solely from the recipient’s perspective.
2. GSTR-2B is not the complete ITC compliance test.
It is an important reconciliation tool, but statutory conditions continue to apply.
3. Section 16(2)(c) has survived constitutional challenge.
The Supreme Court has affirmed its validity.
4. Bona fide purchaser protection is not an automatic defence under GST.
5. Rule 37A must be actively monitored.
Reversal and subsequent re-availment should be tracked systematically.
6. Vendor management is now an important GST control.
7. Businesses should maintain strong documentary evidence.
Conclusion
The Supreme Court’s decision in Bhandari Scrap Traders v. Union of India & Ors. is a significant development in GST jurisprudence.
By upholding Section 16(2)(c), the Supreme Court has reinforced the principle that ITC is subject to the conditions prescribed under the GST legislation, including the requirement relating to payment of tax to the Government by the supplier.
For businesses, the practical lesson is clear: GST compliance cannot stop at collecting a tax invoice and reconciling GSTR-2B. Supplier compliance must form part of the recipient’s ITC risk-management framework.
Companies should therefore strengthen vendor due diligence, monthly ITC reconciliation, Rule 37A monitoring and documentation of supplier follow-ups.
The decision is particularly relevant for businesses with large procurement volumes and significant ITC exposure, where supplier defaults can create substantial working-capital and litigation risks.
Legal Reference: Bhandari Scrap Traders v. Union of India & Ors., SLP(C) No. 23931/2026 and connected matters, Supreme Court of India, order dated 24 July 2026. The Supreme Court’s case listing records the matter and date of order. (Supreme Court of India)
Disclaimer: This article is intended for general information and educational purposes and should not be treated as a substitute for examination of the specific facts, records and applicable GST provisions of an individual taxpayer.
