TaxTMI 
TaxTMI 
Your supplier pocketed the GST. Here's why you lose the ITC, and what to fix in your next purchase order
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....our supplier pocketed the GST. Here's why you lose the ITC, and what to fix in your next purchase order<br>By: - Pradeep Reddy Unnathi Partners<br>Goods and Services Tax - GST<br>Dated:- 22-8-2026<br>A client called last week. He'd paid his supplier in full, GST included, on time, by bank transfer. The supplier never deposited that tax with the government. Now the department wants my client to reverse the input tax credit and pay interest on it. He asked me what we could do about it. For those past invoices, the honest answer is: very little, and nothing that involves winning on constitutional grounds. On 24 July 2026, the Supreme Court dismissed the special leave petitions in Bhandari Scrap Traders Versus Union of India & Ors. -&....
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....nbsp;2026 (7) TMI 1839 - SC Order . A bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva refused to strike down Section 16(2)(c) of the CGST Act, 2017. The Court also refused to read it down. So the position is settled. Your input tax credit depends on your supplier's compliance record just as much as your own paperwork. Below is what the provision says, what the Court actually decided, what's still open for past periods, and the vendor controls worth building now. What Section 16(2)(c) actually says Section 16(2) sets out the conditions you must satisfy before input tax credit is available to you. Clause (c) is the one that bites: "the tax charged in respect of such supply has been actually paid to the G....
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....overnment, either in cash or through utilisation of input tax credit admissible in respect of the said supply." Read the four conditions in Section 16(2) together and the problem becomes obvious. You need a tax invoice. You need to have received the goods or services. You need to have filed your return under Section 39. Those three sit inside your own business. The fourth one sits inside somebody else's. The tax has to reach the government, and you have no way to make that happen. Section 16(2)(aa), inserted with effect from 1 January 2022, tightened it further. The invoice now has to appear in your GSTR-2B before you can take the credit at all. Section 155 completes the picture: when credit is in dispute, the burden of prov....
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....ing eligibility is on you, the person claiming it. What the Supreme Court held in Bhandari Scrap Traders The petitioners had challenged the Gujarat High Court's judgment in Maruti Enterprise Through Its Authorized Partner, Jigneshbhai Bharatbhai Tarpara, Bhandari Scrap Traders Through Its Prop. Gopalbhai Champaklal Sharma Versus Union Of India & Ors. - 2026 (5) TMI 127 - GUJARAT HIGH COURT, which upheld the provision. Their argument was the one every honest buyer makes. I paid the tax to my supplier. I have the invoice, the goods, the transport documents, the bank statement. Denying me credit for someone else's default asks me to do the impossible. The Supreme Court held that the High Court "was fully justified in holdin....
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....g that no grounds were made out to declare Section 16(2)(c) of the CGST Act as unconstitutional." Two threads run through the reasoning. First, input tax credit under GST is a statutory concession, available on the conditions Parliament attached to it. A buyer cannot claim credit on the strength of an invoice alone when the statute asks for actual payment of tax. Second, the CGST Act already contains machinery that the older VAT statutes did not. Sections 73 and 74 let the department recover the unpaid tax from the defaulting supplier. Section 41(2) read with Rule 37A lets you take the credit back once the supplier pays. The scheme, on the Court's reading, is not a dead end. The bench did acknowledge the position of bona fid....
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....e buyers, and suggested the government build better tracking of defaulting suppliers and pursue recovery from them. That's a policy observation. It is not relief, and no officer is bound by it. Why the VAT-era judgments no longer carry you For years, taxpayers relied on the Delhi High Court's decisions in On Quest Merchandising India Pvt. Ltd., Suvasini Charitable Trust, Arise India Limited, Vinayak Trexim, K.R. Anand, Aparici Ceramica, Arun Jain (HUF), Damson Technologies Pvt. Ltd., Solvochem, M/s. Meenu Trading Co., & Mahan Polymers Versus Government of NCT of Delhi & Ors. & Commissioner of Trade & Taxes, Delhi And Ors. - 2017 (10) TMI 1020 - DELHI HIGH COURT, where Section 9(2)(g) of the Delhi VAT Act was read down to ....
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....protect purchasers who had done nothing wrong. The special leave petition against Arise India was dismissed in 2018. Those judgments turned on the DVAT scheme, which offered a purchaser no route back once credit was denied. The Supreme Court in Bhandari Scrap Traders drew a line between that scheme and the CGST Act. Different statute, different machinery. Citing the VAT line of cases on the constitutional question is now a losing argument. One line of GST cases does survive, and it matters. The Calcutta High Court in Suncraft Energy Private Limited And Another Versus The Assistant Commissioner, State Tax, Ballygunge Charge And Others - 2023 (8) TMI 174 - CALCUTTA HIGH COURT set aside a demand raised on a recipient where the de....
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....partment had made no enquiry against the supplier at all. The revenue's SLP was dismissed. That is a procedural point about how the department must proceed, and Bhandari Scrap Traders did not disturb it. It gives you an argument on sequencing. It does not give you the credit. The Rule 37A trap, and how the timing works Rule 37A is where most disputes now begin, because it runs on dates rather than on investigation. If your supplier reported the invoice in GSTR-1 but did not file the GSTR-3B for that tax period by 30 September following the end of the financial year, you have to reverse that credit in your own GSTR-3B filed on or before 30 November of that year. Miss the 30 November date and the amount becomes payable with in....
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....terest under Section 50. The rule also gives you the way back. Once the supplier files the missing GSTR-3B, you re-avail the credit in a subsequent return. There's no time limit under Section 16(4) on that re-availment, since it's a restoration of credit already taken. So the practical question for any notice you're facing is a factual one. Has the supplier filed since? A lot of reversals demanded in 2024 and 2025 relate to suppliers who caught up on their returns 8 or 10 months late. What's still available for past transactions I told my client his options were thin. Thin is not zero. Four things are worth checking before you accept a reversal. 1. Check whether the supplier has filed since. Pull the return fi....
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....ling status for that GSTIN on the GST portal. If the GSTR-3B for the relevant period is now on record, you re-avail under Section 41(2) with Rule 37A and reply to the notice on that footing. 2. Use Circular 183/15/2022-GST for FY 2017-18 and FY 2018-19. For mismatches in those two years, the circular lets you establish that tax was paid through a certificate from the supplier. Where the credit involved exceeds Rs. 5,00,000 in a financial year for that supplier, the certificate has to come from a Chartered Accountant or Cost Accountant, with a UDIN. Below that, the supplier's own certificate works. Circular 193/05/2023-GST dated 17 July 2023 extends the same treatment to 1 April 2019 to 31 December 2021, subject to the 20%, 10% and 5%....
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.... caps that applied in those sub-periods. 3. Push the department to proceed against the supplier. Where the show cause notice lands on you without any recorded enquiry into the defaulting supplier, the Suncraft Energy line is a live argument, and several High Courts have followed it. 4. Build the evidence file anyway. Section 155 puts the burden on you. Invoice, e-way bill, weighbridge slip or lorry receipt, goods receipt note, bank payment advice showing full invoice value including tax, and the GSTR-2B in which the invoice appeared. This does not defeat Section 16(2)(c) on its own, but it removes the alternative allegation that the transaction was a paper one, which carries Section 74 penalties on a different scale. The vendor con....
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....trols worth running every month Two habits do most of the work here. Check filing status before you release payment, not after. The GST portal's "Search Taxpayer" tab shows registration status and the return filing history for any GSTIN, free, without login. A supplier who is 2 quarters behind on GSTR-3B is telling you something. Reconcile GSTR-2B every month and act on the gaps the same month. Most businesses reconcile. Fewer chase the mismatches while the supplier still needs their next order. You have the most pull with a vendor before their money goes out, and almost none 14 months later when the notice arrives. Watch for the specific signals: registration suspended or cancelled, a sudden change in principal place of bus....
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....iness, GSTR-1 filed but GSTR-3B skipped for several periods running. That last pattern is the classic one, because it puts the invoice in your GSTR-2B while the tax never moves. Six clauses to put in your purchase order Draft these into your standard PO terms and your vendor agreements. They cost nothing to insert and they change the conversation when something goes wrong. 1. Reporting obligation. The supplier shall report the invoice correctly in FORM GSTR-1 or IFF for the relevant tax period and file FORM GSTR-3B within the prescribed due date. 2. Right to withhold. You may withhold an amount equal to the GST component of any invoice until the supplier's payment of that tax is reflected on the GST portal. 3. Payment lin....
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....ked to confirmation. Release of the GST component is conditional on the invoice appearing in your GSTR-2B and the supplier's GSTR-3B for that period being filed. 4. Rectification timeline. On any mismatch, the supplier shall rectify it in the return for the next tax period, failing which you may withhold or recover the disputed amount. 5. Indemnity. The supplier indemnifies you against tax, interest and penalty demanded from you on account of the supplier's default, including costs of defending the proceedings. 6. Recovery and set-off. Amounts due under the indemnity may be adjusted against any sum payable to the supplier under this or any other contract between the parties. A note on drafting order. Clauses 2 and 3 are ....
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....worth more than clause 5, because a withholding right operates by itself. You just don't pay. An indemnity needs a demand, then a refusal, then litigation. What these clauses will and won't do They will not stop the department from denying your credit. The department is not a party to your contract, and Section 16(2)(c) does not care what your PO says. What they give you is a contractual right against the supplier, enforceable through a civil suit or arbitration, and a documented basis for holding money back before it ever leaves your account. Two practical limits to keep in mind. Limitation for a contract claim runs 3 years, and the clock generally starts when the loss crystallises, which is the date of the demand or th....
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....e reversal rather than the date of the invoice. And a supplier who couldn't pay Rs. 4,00,000 of GST is often not a defendant worth suing, which is exactly why the withholding clause matters more than the indemnity. Yes, enforcing any of this means paying another professional. That is the cost of doing business in India with a credit chain you don't control. =============<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....