Supplier's Default and ITC: Supreme Court Upholds Section 16(2)(c) of the CGST Act
The Supreme Courts decision in Bhandari Scrap Traders v. Union of India, decided on 24 July 2026, brings significant clarity to a contentious issue under GST: whether input tax credit (ITC) can be denied to a recipient where the supplier has failed to discharge the corresponding tax liability.
The challenge concerned Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act), which makes actual payment of tax by the supplier to the Government a condition for availment of ITC. The petitioners argued that where a recipient had entered into a genuine transaction, received the goods or services, possessed the requisite documentation and paid the supplier including GST, it should not lose ITC because of a subsequent default by the supplier.
The Supreme Court rejected the challenge and affirmed the Gujarat High Courts decision in Maruti Enterprise v. Union of India, 2026 (109) G.S.T.L. 97 (Guj.). It held that there was no ground to declare Section 16(2)(c) unconstitutional or to read it down. The Court specifically endorsed the Gujarat High Courts reliance on Sections 41, 73 and 74 of the CGST Act, under which reversed ITC can be re-availed once the supplier subsequently discharges the tax liability.
The ruling reinforces an important proposition: ITC under GST is a statutory benefit subject to conditions prescribed by Parliament, and the recipients compliance with its own obligations does not override the statutory requirement relating to payment of tax by the supplier.
The Courts reasoning and the VAT distinction
The petitioners challenged Section 16(2)(c) under Articles 14, 19(1)(g), 265 and 300A of the Constitution and alternatively sought its reading down so that it would apply only to fraudulent, collusive or non-bona fide transactions.
The Gujarat High Court rejected this approach in Maruti Enterprise, holding that ITC is a statutory concession subject to the conditions prescribed under the CGST Act. It also examined the provision within the broader GST framework, including the mechanism for reversal and subsequent re-availment of credit. The Supreme Court has now expressly affirmed that reasoning.
A significant aspect of the Supreme Courts decision is its rejection of the attempt to draw a direct analogy with earlier VAT jurisprudence concerning bona fide purchasers. The Court noted that the Gujarat High Court had undertaken a detailed comparison between the Delhi VAT Act and the CGST Act and found material differences in their respective ITC mechanisms. Consequently, a purchasing dealer under GST could not simply be placed on the same footing as a bona fide purchaser under the Delhi VAT regime where the selling dealer had defaulted in payment of tax.
The distinction is important. Earlier VAT decisions protecting bona fide purchasers cannot now be relied upon as a general answer to supplier-default ITC disputes under GST. The constitutional analysis must be undertaken against the specific statutory architecture of GST.
The Courts reliance on Section 41 is equally significant. The GST framework does not necessarily contemplate permanent extinction of credit merely because the supplier has not paid tax at a particular point in time. It provides for reversal and subsequent re-availment once the supplier discharges the underlying liability. The Supreme Court expressly recognised this mechanism.
The judgment therefore upholds the statutory condition for availment of ITC without necessarily converting every supplier default into a permanent loss of credit.
Implications for taxpayers and the Department
The immediate consequence for taxpayers is that the constitutional argument based solely on the recipients bona fides has become considerably weaker. Possession of a valid invoice, payment to the supplier and receipt of goods or services will not, by themselves, insulate ITC from the consequences of supplier-side non-payment.
Supplier compliance consequently becomes an important component of ITC risk management. Businesses with significant procurement volumes should strengthen vendor due diligence, monitor supplier filing behaviour and maintain records of supplier follow-ups, reconciliations and subsequent compliance. The Gujarat High Court also recognised the relevance of contractual safeguards, including indemnification for loss of ITC arising from supplier default.
The ruling may therefore have a broader commercial impact than its constitutional holding suggests. Supplier GST compliance can directly affect a recipients working capital and tax exposure, particularly in large or fragmented supply chains.
At the same time, the judgment should not be overstated. The Supreme Court has upheld the constitutional validity of Section 16(2)(c). It has not held that every mismatch between supplier filings and recipient records automatically establishes wrongful availment of ITC.
The factual application of the provision will continue to matter. Whether the supplier actually failed to discharge the relevant tax, whether the tax was subsequently paid, whether the reversal mechanism applies and whether the Department has established the basis for the proposed denial will remain relevant in individual proceedings.
Accordingly, while a constitutional challenge to Section 16(2)(c) has become considerably more difficult, taxpayers can still contest an incorrect factual or legal application of the provision.
The judgment also does not determine every dispute involving fraudulent or fictitious transactions. Cases involving fake invoices, sham transactions or collusion may raise separate questions under the CGST Act and must be examined on their own facts.
What comes next?
Bhandari Scrap Traders is likely to shift the focus of supplier-default ITC litigation from constitutional validity to statutory application.
The Supreme Court has now confirmed that Section 16(2)(c) is constitutionally valid and cannot be read down merely to create an exception for bona fide purchasers. It has also made clear that the GST regime cannot be equated with earlier VAT frameworks simply because both contain provisions concerning input tax credit.
The more difficult questions are likely to concern how supplier non-payment is established, what evidence is sufficient for denial of credit, how reversal and re-availment operate across tax periods, and what happens where the supplier subsequently pays the tax after proceedings have already been initiated against the recipient.
For businesses, the practical lesson is clear. ITC risk extends beyond the recipients own books and returns. Supplier compliance is now an important part of the overall ITC governance framework.
For the Department, the judgment provides strong support for enforcing Section 16(2)(c), while leaving intact the requirement that its application be supported by the facts and the statutory scheme.
The constitutional question may now have its answer. The next phase of litigation will likely centre on how Section 16(2)(c) operates in practice, what establishes supplier default, and how the GST framework balances revenue protection with the commercial realities of genuine supply chains.
Case Citation: SLP (C) Nos. 23931, 24088 & 24103 of 2026, decided on 24th July 2026
