Seller Fails to Deposit GST : Can the Buyer Be Denied Input Tax Credit?

Supreme Court affirms Gujarat High Court ruling on the validity of Section 16(2)(c) of the CGST Act

A registered buyer purchases goods in the ordinary course of business. The goods are received, a valid tax invoice is issued, and the buyer pays the complete invoice amount, including GST, to the supplier. The supplier also reports the invoice, allowing it to appear in the buyer’s GSTR-2A or GSTR-2B.But the supplier does not deposit the GST with the Government.

Can the buyer’s Input Tax Credit be denied for a default committed by the supplier? Is the buyer expected to ensure that tax has actually reached the Government treasury? Or should the Department recover it from the seller who collected the tax but failed to deposit it?

The Supreme Court has now considered this controversy in Bhandari Scrap Traders v. Union of India & Others, while examining the Gujarat High Court’s common judgment in Maruti Enterprise v. Union of India & Others.

On 24 July 2026, the Supreme Court dismissed the special leave petitions and expressly affirmed the Gujarat High Court’s ruling that Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, is constitutionally valid and cannot be read down in the manner requested by the purchasing dealers.

The decision settles the constitutional challenge raised before the Gujarat High Court. However, it does not dispose of the individual disputes regarding the genuineness of purchases, supplier defaults, interest, penalties and other factual issues. Those questions were expressly left open by the Gujarat High Court for determination on merits.

Supreme Court decision in Bhandari Scrap Traders

The proceedings before the Supreme Court

The principal matter before the Supreme Court was:

Bhandari Scrap Traders v. Union of India & Others - Petition for Special Leave to Appeal (Civil) No. 23931 of 2026

The petition arose from the Gujarat High Court’s judgment dated 1 May 2026 in Special Civil Application No. 749 of 2025.

What was challenged before the Supreme Court?

The petitioners challenged the Gujarat High Court’s conclusion that Section 16(2)(c) of the CGST Act was neither unconstitutional nor required to be read down.

Section 16(2)(c) provides that a registered person is not entitled to ITC unless the tax charged on the relevant supply has actually been paid to the Government, either in cash or through utilisation of admissible ITC.

The purchasing dealers wanted the provision to be interpreted in a manner that protected bona fide buyers where:

• the transaction was genuine;

• goods or services were actually received;

• valid tax invoices were available;

• consideration and tax were paid to the supplier; and

• the buyer had no involvement in the supplier’s failure to deposit tax.

The Gujarat High Court had rejected that constitutional challenge. The purchasing dealers therefore approached the Supreme Court.

What did the Supreme Court decide?

The Supreme Court dismissed the special leave petitions and affirmed the Gujarat High Court judgment. The order was not a simple, unreasoned dismissal. The Supreme Court examined the central basis of the Gujarat High Court’s decision and recorded why it agreed with it.

The Court stated:

“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 accordingly dismissed.

Why did the Supreme Court agree with the Gujarat High Court?

The Supreme Court focused on three principal aspects.

Delhi VAT and CGST cannot be treated as identical

The petitioners relied on decisions concerning the Delhi Value Added Tax Act, 2004, where bona fide purchasers had received protection against denial of ITC due to a seller’s failure to deposit tax.

The Supreme Court noted that the Gujarat High Court had undertaken a detailed analysis, beginning from paragraph 42 of its judgment, explaining the differences between:

• the Delhi VAT Act; and

• the CGST Act.

The Supreme Court agreed that parity could not be drawn between a purchasing dealer under the CGST Act and a bona fide purchasing dealer under the Delhi VAT Act when the supplier failed to pay the requisite tax.

This distinction was central to the Supreme Court’s order.

The Gujarat High Court had examined the complete GST credit mechanism

The Supreme Court specifically referred to the Gujarat High Court’s analysis of the GST ITC framework in paragraph 56 of the impugned judgment.

The GST system is not confined to a simple transaction between a seller and buyer within one State. It includes:

• self-assessed tax liabilities;

• electronic credit ledgers;

• reversal and re-availment of credit;

• inter-State movement of ITC; 

• IGST settlement; and

• transfers between the Centre, originating State and destination State.

The Supreme Court accepted that Section 16(2)(c) must be considered within this broader statutory framework.

Reversed ITC can be re-availed after the supplier pays tax

The Supreme Court also noted the Gujarat High Court’s reliance on Section 41 of the CGST Act and the recovery provisions contained in Sections 73 and 74.

The Court observed that the Gujarat High Court had considered the purchaser’s ability to re-avail reversed ITC after the supplier was made to discharge the tax liability.

Accordingly, the Supreme Court found that the Gujarat High Court was fully justified in holding that there were no grounds to:

• declare Section 16(2)(c) unconstitutional; or

• read down the provision.

What happened to the Tripura High Court decision in Sahil Enterprises?

The Supreme Court was informed that a special leave petition had been entertained in relation to the Tripura High Court’s decision in Sahil Enterprises v. Union of India & Others.

The Tripura High Court had taken a view favourable to bona fide purchasers and had read down Section 16(2)(c).

However, the Supreme Court distinguished Sahil Enterprises.

It observed that the detailed exercise undertaken by the Gujarat High Court had not been undertaken by the Tripura High Court. In particular, the Gujarat High Court had examined:

• the distinction between the Delhi VAT and GST regimes;

• the complete statutory scheme governing ITC;

• Section 41;

• the reversal and re-availment mechanism; and

• the Department’s recovery powers under Sections 73 and 74.

The Supreme Court therefore did not consider the pendency of the matter arising from Sahil Enterprises to be a reason for interfering with the Gujarat High Court judgment.

Key effect of the Supreme Court order

Following Bhandari Scrap Traders, the constitutional position emerging from the two connected judgments is that:

• Section 16(2)(c) remains constitutionally valid.

• Actual payment of tax to the Government remains a statutory condition for ITC.

• The provision has not been read down to create an automatic exception for every bona fide purchaser.

• The Delhi VAT decisions cannot automatically be applied to the GST legislation.

• The provisions for reversal, supplier recovery and subsequent re-availment form part of the statutory balance under GST.

• The Gujarat High Court’s common judgment has been expressly affirmed and upheld by the Supreme Court.

To understand how this position was reached, it is necessary to examine the Gujarat High Court judgment in detail.

Gujarat High Court decision in Maruti Enterprise

Case details

Maruti Enterprise through its Authorized Partner Jigneshbhai Bharatbhai Tarpara v. Union of India & Others

The sole constitutional issue was whether Section 16(2)(c) was arbitrary, unconstitutional or required to be read down where a genuine purchaser was denied ITC due to the supplier’s failure to deposit tax.

What was the purchasers’ grievance?

The petitioners’ case centred on a situation where the buyer had allegedly completed every obligation within its control, but the supplier had not deposited the GST collected.

The petitioners contended that a buyer may possess:

• a valid tax invoice;

• proof of receipt of goods or services;

• proof of payment to the supplier;

• an invoice reflected in GSTR-2A or GSTR-2B; and

• evidence showing that the transaction was genuine.

Despite this, ITC could be denied solely because the supplier failed to pay tax to the Government.

The petitioners argued that the buyer could neither control the supplier nor verify the supplier’s actual tax payment. Imposing the consequence of the supplier’s default on the buyer was therefore challenged as arbitrary.

What relief did the purchasers seek?

The petitioners requested the High Court to declare Section 16(2)(c) unconstitutional on the ground that it violated:

• Article 14;

• Article 19(1)(g);

• Article 265; and

• Article 300A of the Constitution.

Alternatively, they requested that the provision be read down.

Under the proposed interpretation, ITC could be denied where the purchasing dealer:

• colluded with the supplier;

• participated in fraud;

• connived in the tax evasion; or

• knew or ought to have known about the fraudulent transaction.

However, a bona fide purchaser who had no connection with the supplier’s default would remain protected.

The purchasers’ arguments before the Gujarat High Court

A buyer cannot see whether the supplier paid the tax

The petitioners explained that the GST system is linked to statutory forms and the supplier’s GSTIN.

The supplier files its outward supply details in GSTR-1. These details are communicated to the recipient through GSTR-2A and GSTR-2B. The buyer claims ITC on the basis of the data made available through the GST portal.

However, the buyer does not have access to the supplier’s complete:

• GSTR-3B;

• tax payment records;

• electronic cash ledger;

• electronic credit ledger;

• utilisation of ITC; or

• invoice-wise discharge of output tax.

The buyer may know that an invoice has been reported, but cannot confirm whether the supplier has actually deposited the tax charged on that invoice.

The petitioners relied upon the maxim lex non cogit ad impossibilia, which means that the law does not compel a person to do the impossible.

The other conditions already establish genuineness

The petitioners argued that Section 16(2) contains separate conditions relating to:

• possession of an invoice;

• reporting of the invoice by the supplier;

• communication to the recipient;

• actual receipt of goods or services;

• absence of restriction under Section 38;

• payment of tax to the Government; and

• filing of the recipient’s return.

According to them, the genuineness of a purchase is examined through the invoice, communication and receipt conditions.

Once a genuine transaction is established, the only remaining question under clause (c) is whether the supplier deposited tax. That event takes place after the buyer has paid the supplier and remains entirely outside the buyer’s control.

Genuine and fraudulent purchasers were being treated alike

The petitioners submitted that Section 16(2)(c) did not distinguish between:

• a purchaser who honestly received goods and paid the supplier; and

• a purchaser who colluded with a bogus or defaulting supplier.

Both could lose ITC if the seller failed to deposit tax.

According to the petitioners, a bona fide purchaser and a fraudulent purchaser are two unequal categories. Subjecting both to the same consequence violated Article 14.

The seller’s liability was being shifted to the buyer

Section 9 ordinarily makes the supplier liable to pay GST on a forward charge supply.

The supplier collects the tax from the buyer and must deposit it with the Government. The buyer has no statutory responsibility to deposit the supplier’s output tax.

The petitioners argued that denying ITC to the purchaser effectively shifted the supplier’s tax burden to the purchaser without establishing any fault on the purchaser’s part.

Denial of ITC caused cascading

The buyer had already paid the tax component to the supplier. If ITC was denied, the buyer would have to discharge output tax without obtaining credit for the tax already borne on the purchase.

According to the petitioners, this recreated the cascading effect that GST was intended to eliminate.

They also argued that the Department continued to possess powers to recover the same unpaid tax from the supplier.

Reliance on Delhi VAT decisions

The petitioners principally relied on the Delhi High Court’s decision in On Quest Merchandising India Pvt. Ltd. v. Government of NCT of Delhi.

In that case, Section 9(2)(g) of the Delhi VAT Act was read down to protect bona fide purchasers where the seller failed to deposit tax.

The Delhi High Court had reasoned that a purchaser could verify whether a seller was registered, but could not be expected to continuously verify whether the seller deposited the tax collected.

The petitioners also relied on the later Supreme Court treatment of the Delhi VAT decisions, including Arise India Ltd. and Shanti Kiran India Pvt. Ltd.

Reliance on the “knew or ought to have known” test

The petitioners referred to the European Court of Justice decision in Axel Kittel v. Belgian State and Belgian State v. Recolta Recycling SPRL.

The principle relied upon was that VAT credit may be denied if a person knew or ought to have known that the transaction was connected with tax fraud.

Credit should not be denied where the person neither knew nor could reasonably have known about the seller’s fraudulent conduct.

What did the Revenue say?

Revenue argued that ITC is not an absolute, fundamental or vested right. It is a statutory benefit available only when every condition prescribed by the CGST Act is fulfilled.

Payment of tax by the buyer to the supplier is not the same as payment of tax to the Government. Section 16(2)(c) expressly requires the tax charged on the supply to be actually paid to the Government.

According to Revenue, the language of the provision is clear. Courts cannot remove the condition merely because it causes hardship.

Revenue also relied upon Section 155, which places the burden of proving ITC eligibility upon the person claiming it. The buyer must therefore establish compliance with all the conditions, including clause (c).

Revenue’s reliance on Section 41 and Rule 37A

Revenue referred to the substituted Section 41.

Where the supplier fails to pay tax, the recipient is required to reverse the ITC with applicable interest. Once the supplier pays the tax, the recipient can re-avail the credit.

Rule 37A provides the operational mechanism where:

• the supplier reports an invoice in GSTR-1 or IFF;

• the corresponding credit appears in the recipient’s GSTR-2B; but

• the supplier does not furnish the corresponding GSTR-3B.

Revenue argued that this mechanism protects the Government until the tax is received while permitting the purchaser to re-avail the credit after the supplier complies.

Why Revenue said the Delhi VAT cases were different

Revenue submitted that the Delhi VAT decisions could not govern the GST controversy.

The GST legislation contains provisions such as:

• Section 41;

• Section 53;

• Section 155; and

• Rule 37A.

These provisions did not have direct equivalents in the Delhi VAT framework considered in On Quest.

GST is also a destination-based tax under which credit travels across State boundaries. Revenue argued that allowing ITC without receipt of the corresponding tax could require one Government to transfer an amount that it never collected.

How did the Gujarat High Court decide the controversy?

ITC is linked to taxes actually paid

The Court referred to the Statement of Objects and Reasons of the CGST legislation, which contemplates the availability of ITC in respect of “taxes paid”.

It held that the right to avail ITC is intrinsically connected with actual payment of tax.

All conditions under Section 16(2) are cumulative

The High Court rejected the argument that Revenue must stop its enquiry after the purchaser proves:

• possession of an invoice; and

• actual receipt of goods or services.

According to the Court, clauses (a) to (d) must be read together.

A purchaser does not become entitled to ITC merely by proving the invoice and receipt conditions. The additional requirement of actual payment of tax to the Government under clause (c) must also be satisfied.

Section 155 places the burden on the claimant

The Court held that the purchasing dealer bears the initial burden of establishing eligibility for ITC.

The word “eligible” under Section 155 is connected with fulfilment of all the statutory conditions, including actual payment of tax by the supplier.

The Court therefore rejected the argument that invoices, receipt of goods and GSTR-2B reflection were sufficient to complete the purchaser’s burden.

GST and Delhi VAT operate differently

The Court examined the Delhi High Court’s reasoning in On Quest but held that Section 9(2)(g) of the Delhi VAT Act could not be equated with Section 16(2)(c) of the CGST Act.

Under the GST framework, ITC can move across State boundaries through the IGST mechanism. Section 53 requires transfers between the relevant tax accounts.

If a supplier in the originating State does not pay tax but credit is still allowed in the destination State, the originating Government may be required to transfer an amount that it never received.

The Court considered this fiscal structure an important reason for maintaining the actual payment condition.

Gujarat High Court disagreed with Sahil Enterprises

The Tripura High Court in Sahil Enterprises v. Union of India had followed the Delhi VAT approach and read down Section 16(2)(c).

The Gujarat High Court expressly declined to follow that view.

It held that the Tripura High Court had not adequately considered the combined effect of:

• Section 41;

• Section 53;

• Section 155; and

• Rule 37A.

This disagreement was later specifically noticed by the Supreme Court in Bhandari Scrap Traders.

Reversal does not always result in permanent loss

The High Court considered the reversal and re-availment mechanism under Section 41 and Rule 37A.

It held that the purchaser can re-avail the credit when the supplier subsequently discharges the tax liability.

Accordingly, the statutory scheme does not necessarily deprive the purchaser of ITC permanently. Mere delay or hardship in receiving the benefit was not considered sufficient to invalidate Section 16(2)(c).

Contractual protection against supplier default

The Court acknowledged that the purchaser cannot compel the supplier to deposit tax.

However, it observed that purchasers can exercise due care and include an indemnity clause in their agreements. Such a clause may require the supplier to compensate the purchaser for a loss caused by the supplier’s failure to remit GST.

The Court relied upon the possibility of contractual protection while rejecting the argument that the statutory condition required the purchaser to perform a completely impossible act.

Gujarat High Court’s final verdict

The Gujarat High Court refused to declare Section 16(2)(c) unconstitutional.

It also refused to read down the provision to automatically exclude bona fide purchasers.

The Court held that:

• Section 16(2)(c) is clear and unambiguous;

• ITC is a statutory concession;

• all conditions under Section 16(2) must be satisfied together;

• actual payment of tax remains a condition for ITC;

• Section 16(2)(c) must be read with the other provisions of the GST law;

• the burden of establishing eligibility lies upon the person claiming ITC; and

• reversal followed by re-availment maintains a balance between the interests of Revenue and the purchaser.

The constitutional challenge was therefore rejected.

Important observations in favour of genuine purchasers

• Although the Gujarat High Court upheld Section 16(2)(c), it did not disregard the difficulties faced by bona fide purchasers.

• In paragraph 87, the Court referred to the approach in Axel Kittel. It observed that, under that principle, ITC may be denied where it is shown that the recipient knew or ought to have known that the purchase was connected with fraudulent tax evasion.

• However, the Court did not formally read this qualification into Section 16(2)(c). Its application to the facts of individual petitioners was left open.

• The Court also recognised that the Government has adequate powers under Sections 73 and 74 to proceed against defaulting suppliers.

• It stated that prompt and immediate steps should be taken to recover tax from erring suppliers instead of compelling purchasers to pursue cumbersome alternative remedies.

Court calls for legislative and technological reform

The Gujarat High Court acknowledged that Section 16(2)(c) serves the legitimate objective of maintaining the integrity of the tax chain and preventing systemic revenue loss.

At the same time, it called upon the Government to comprehensively reconsider the difficult position faced by genuine purchasers.

The Court identified a need for:

• legislative amendments or clarifications;

• relief from disproportionate financial and administrative burdens;

• a robust technology-driven tracking system;

• invoice-wise verification of tax payment in real time;

• protection of bona fide purchasers from supplier defaults; and

• prompt recovery action against non-compliant suppliers.

The Court cautioned that, without effective oversight and recovery, unscrupulous sellers may enrich themselves at the cost of both the Government and honest purchasers.

Were the individual ITC disputes finally decided?

No.

The Gujarat High Court expressly clarified that it had not examined the merits of the individual petitions.

Its judgment was confined to the constitutional validity and interpretation of Section 16(2)(c).

After deciding the constitutional question, the Court directed the Registry to list the petitions for determination on merits. All remaining contentions and rights of the respective parties were kept open.

The Supreme Court affirmed and upheld this judgment. Therefore, the constitutional challenge has been resolved, but the individual factual disputes remain to be decided.

Combined effect of the two judgments

Issue	Position after Bhandari Scrap Traders and Maruti Enterprise
Validity of Section 16(2)(c)	Upheld
Request to read down Section 16(2)(c)	Rejected
Actual payment of tax as a condition for ITC	Confirmed
Automatic protection for every bona fide buyer	Not recognised by reading down the provision
Application of Delhi VAT decisions to GST	Parity rejected
Reversal when supplier fails to pay	Recognised under the GST framework
Re-availment after supplier pays tax	Recognised under Section 41 and Rule 37A
Department’s power against supplier	Recognised under Sections 73 and 74
Constitutional challenge	Concluded against the petitioners
Merits of individual ITC demands	Still open
Genuineness, fraud, interest and penalty	To be decided on individual facts
Need for invoice-wise verification	Government asked to consider it

Questions that still remain open

Even after the Supreme Court’s order, several practical and factual questions remain because the individual petitions were not decided on merits.

How can a buyer establish invoice-wise tax payment when the supplier’s tax records are not visible to it? Is the supplier’s failure to file GSTR-3B sufficient to prove that tax relating to a particular invoice was not paid? What happens when GSTR-3B was filed but the supplier discharged only part of the total liability?

The courts will also have to examine how the “knew or ought to have known” principle referred to by the Gujarat High Court will apply in individual cases. The constitutional validity of Section 16(2)(c) has been upheld, but the judgment does not state that every purchaser must automatically be treated as fraudulent or collusive whenever the supplier defaults.

Finally, the Gujarat High Court’s suggestion of a real-time invoice-wise verification mechanism remains for the Government to consider. Until such a mechanism is introduced, purchasers may continue to face difficulty in verifying whether tax charged by a supplier has actually reached the Government.

Sources: Supreme Court order dated 24 July 2026 in Bhandari Scrap Traders v. Union of India & Others, SLP(C) No. 23931 of 2026 and connected matters; Gujarat High Court common judgment dated 1 May 2026 in Maruti Enterprise v. Union of India & Others, R/Special Civil Application No. 18080 of 2023 and connected matters.

Disclaimer : This article is for informational purposes only and should not be construed as legal or professional advice. Taxpayers should consult their tax advisor based on the facts of their specific case before taking any action.