ITC unavailable to Purchaser u/s 16(2)(c) if supplier has not paid GST to Govt... But GST Dept has to make enquiries...Government has to bring a Tech driven platform to allay genuine concerns of purchaser

The availability of Input Tax Credit (ITC) has been one of the most contested issues under GST. Section 16(2)(c) of the CGST Act mandates that ITC can be availed by a purchaser only if the supplier has actually paid the tax to the government. This provision has led to significant hardship for genuine purchasers who, despite paying the tax component to suppliers, are denied ITC if the supplier defaults in remitting GST.

Supreme Court Ruling: Bhandari Scrap Traders Versus Union of India & Ors. - 2026 (7) TMI 1839 - SC Order

The Supreme Court upheld the constitutional validity of Section 16(2)(c), refusing to "read down" the provision to protect bona fide purchasers. The Court distinguished GST from earlier state level VAT laws, noting that GST is a pan India tax with cascading effects across state boundaries, making strict compliance essential.

Key Observations:

Validity of Section 16(2)(c): ITC remains unavailable to purchasers if suppliers fail to remit GST.

Distinction from VAT: The Court rejected parity with Delhi VAT Act, emphasizing GST's national character.

Tripura High Court's case M/s. Sahil Enterprises Versus Union of India, through its Secretary, Government of India, Ministry of Finance, Department of Revenue, New Delhi., Commissioner, Central Goods & Services Tax, Tripura Assistant Commissioner, Tripura M/s. Sentu Dey, Represented by its Proprietor Sri Sentu Dey, Bairagi Bazar, Jumerdhepha - 2026 (1) TMI 385 - TRIPURA HIGH COURT  : The Supreme Court declined to follow the Tripura HC's reading down of Section 16(2)(c), noting that the Gujarat HC had undertaken a more detailed comparative exercise.

Government's responsibility: The High Court had earlier urged the government to implement a technology driven tracking mechanism to alleviate disproportionate burdens on purchasers.

Recovery focus: High Court had earlier also held that Authorities must prioritize recovery of tax from defaulting suppliers rather than penalizing purchasers.
Legislative expectation: The High Court had earlier expressed hope that the government would address genuine purchaser concerns through amendments or clarifications. Open Doors for Purchasers

In our view, while the ruling narrowed the battleground, several avenues remain open for purchasers:

Recovery from suppliers: Demand that revenue authorities exhaust recovery options against defaulting suppliers first, as directed in the Suncraft Energy case.

Retrospective cancellation: ITC cannot be denied merely because a supplier's GST registration was cancelled retrospectively.

Wrong GSTN entry: ITC cannot be denied solely due to supplier mentioning the wrong GSTN of another branch under the same PAN.

Section 41 remedies: Purchasers can re avail reversed ITC once suppliers pay the tax.

Pending litigation: Though the Sahil Enterprises SLP is effectively closed, its arguments continue to influence discourse.

Legal action against suppliers: Purchasers retain the option to initiate civil or criminal proceedings against defaulting suppliers.

Compliance Outlook

The ruling underscores the tension between protecting revenue and safeguarding bona fide taxpayers. For businesses, the compliance landscape now requires:

Enhanced vendor due diligence: Regularly verify supplier compliance and GST filings.

Technology adoption: Use reconciliation tools to track supplier tax payments.

Contractual safeguards: Insert clauses in supply contracts requiring proof of GST remittance.

Litigation preparedness: Be ready to challenge denial of ITC where recovery against suppliers has not been exhausted.

Conclusion

The Supreme Court's decision in Bhandari Scrap Traders affirms the strict application of Section 16(2)(c), denying ITC to purchasers where suppliers default. Yet, the Court's directions to the government highlight the need for systemic reform. A technology driven platform to track supplier compliance could balance revenue protection with fairness to genuine purchasers. Until such reforms materialize, businesses must adopt proactive compliance strategies, contractual safeguards, and legal remedies to protect their ITC entitlements.