The Supreme Court has recently affirmed the Gujarat High Court's judgment, which held that the Input Tax Credit (ITC) can be availed only if the supplier has actually paid the tax to the government.

A bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva dismissed a batch of petitions filed against the Gujarat High Court's judgment, which had upheld the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, which requires that a buyer cannot claim Input Tax Credit (ITC) unless the seller has actually paid the collected tax to the government.

“…the High Court was fully justified in holding that no grounds were made out to declare Section 16(2) (c) of the CGST Act as unconstitutional or read down the provisions thereof. 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 Court said.

The petitioners have approached the Gujarat High Court challenging the provision of Section 16(2)(c) of the CGST Act as arbitrary, ultra vires, and violative of Articles 14, 19(1)(g), 265, and 300A of the Constitution of India. They argued that the provision places an onerous burden on bona fide purchasers who have no control over whether the supplier deposits the tax with the government, and that they cannot be subjected to denial of ITC solely on the ground that the supplier has failed to deposit the tax.

They had alternatively prayed that the said provision be read down so as to apply only to such transactions that are found to be fraudulent, collusive, or involving connivance between the purchasing dealer and the supplier, thereby excluding those purchasers who have acted bona fide.

The High Court dismissed their pleas, refusing to read down the provision and declared the provision to be constitutional. It reasoned that Section 16(2)(c) when read along with Section 41 and 53 of the CGST Act, adequately protects the interest of the purchasing dealers against their claim for denial of ITC.

“It is well settled that ITC is not a constitutional or vested right, but a statutory concession, subject to the conditions and restrictions prescribed under the Act. Where the statute provides for reversal and re-availment of credit, the same cannot be characterised as double taxation so as to invalidate the provision.”, the High Court said.

The High Court further noted that the mere recovery mechanism under the CGST Act against the supplier cannot be a ground to declare the provision to be unconstitutional, as the purchasing dealer “may pursue appropriate remedies against the supplier, while the Government retains the authority to recover the unpaid tax from the defaulting supplier.”

“The mere absence of a specific statutory mechanism enabling recovery by the purchasing dealer from the supplier cannot, by itself, render Section 16(2) (c) of the CGST Act ultra vires.”, the High Court added.

However, the High Court urged the government to re-evaluate the situation and implement a technology-driven tracking mechanism for real-time verification of tax payments, take prompt recovery action against defaulting sellers, and bring legislative amendments or clarifications to protect genuine buyers.

“There is a pressing need for legislative amendments or clarifications to be issued within the GST framework to alleviate the disproportionate financial and administrative burdens currently placed upon purchasers who have an honest claim of ITC. Beyond mere policy changes, the Government should implement a robust, technology-driven tracking mechanism enabling verification of payments made by suppliers against specific invoices in real time, thereby insulating bona fide recipients from the defaults of their vendors. Simultaneously, the Government has to take prompt and immediate steps for recovery of tax from the erring suppliers, instead of compelling the purchasers to avail themselves of alternate cumbersome remedies. In the absence of stringent oversight, unscrupulous sellers could potentially enrich themselves at the expense of both the public exchequer and honest buyers”., the High Court said.

Cause Title: Bhandari Scrap Traders v. Union of India & Ors. (with connected matters)

Citation : 2026 LiveLaw (SC) 725

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Appearance:

For Petitioner(s) : Mr. Uchit Sheth, Adv. Ms. Uchit Sheth, Adv. Mr. Malak Manish Bhatt, AOR Ms. Sukanya Joshi, Adv. Ms. Somya Saxena, Adv. Ms. Chhavi Tokas, Adv.

For Respondent(s) : None