Supreme Court GST Ruling Changes Input Tax Credit Rules
Supreme Court GST Ruling Raises Fresh Questions Over Input Tax Credit Protection for Businesses
The Supreme Court’s decision in Bhandari Scrap Traders v. Union of India & Ors. has strengthened the legal position of the Government on a key part of the Goods and Services Tax (GST) law, but tax professionals say it has also increased uncertainty for businesses that follow the rules yet depend on their suppliers’ compliance.
Ruturaj Bhide, Associate Partner at Dhruva Advisors India Pvt. Ltd., said the ruling marks an important stage in the long-running debate over Input Tax Credit (ITC), one of the central features introduced when GST replaced multiple indirect taxes in July 2017.
“ITC was one of the defining promises of the GST regime but, nearly a decade later, that promise after a long journey of compliance, litigation and evolution is being tested,” Bhide said.
Under the GST system, businesses can claim credit for tax paid on purchases and use that credit to reduce the tax payable on their sales. The mechanism is designed to avoid the cascading effect of taxation by ensuring that tax is paid only on the value added at each stage of the supply chain.
Since GST was introduced, the Government has steadily tightened compliance through digital reporting, invoice matching and electronic return filing. Businesses have adapted by introducing stronger internal checks before claiming tax credits.
According to Bhide, many taxpayers now rely on invoice matching through GSTR-2B, verify supplier registrations, maintain proper documentation and ensure they meet every compliance requirement that falls within their control before claiming ITC.
“But is that enough? Perhaps not, as per the recent Supreme Court order in Bhandari Scrap Traders,” he said.
The dispute centred on Section 16(2)(c) of the Central Goods and Services Tax (CGST) Act, which states that a buyer can claim Input Tax Credit only if the supplier has actually paid the tax collected on that transaction to the Government.
The Supreme Court declined to grant leave to appeal filed by the taxpayer, effectively allowing the Gujarat High Court’s judgment to stand. As a result, the constitutional validity of Section 16(2)(c) remains intact.
The ruling supports the view that Input Tax Credit is linked not only to the buyer’s compliance but also to the supplier’s payment of tax.
Bhide noted that this differs from the approach taken earlier by the Tripura High Court in the Sahil Enterprises case, where the provision had been interpreted in a less restrictive manner.
From the Government’s perspective, the reasoning behind the law is straightforward. Allowing tax credit where the corresponding tax has never reached the public treasury could result in revenue loss.
Bhide acknowledged this point, stating that “the Government cannot be expected to grant credit if the corresponding tax has never reached the exchequer.”
However, he argued that the practical difficulty lies elsewhere.
A purchasing business has no direct way of confirming whether a supplier has ultimately deposited GST collected on a specific invoice. The GST portal allows recipients to check whether an invoice has been uploaded through GSTR-1 and reflected in GSTR-2B. It does not reveal whether the supplier has actually paid the tax related to that invoice.
This creates a situation where a business may complete every compliance step available to it but could still face denial of Input Tax Credit because of a supplier’s failure to meet its own tax obligations.
The issue has become increasingly important as Indian businesses depend on complex supply chains involving hundreds or even thousands of vendors. Larger companies often operate detailed vendor verification programmes, while smaller businesses may have fewer resources to monitor supplier compliance beyond the information available on the GST portal.
Tax experts have repeatedly argued that buyers acting in good faith should not automatically lose tax credits because of a supplier’s default, particularly when the buyer has no legal power to compel payment of GST by another business.
Bhide believes the latest judgment does not settle every legal question surrounding the issue.
“While the Supreme Court endorsed the position that tax should reach the exchequer to enable ITC to the recipient, the judgment is unlikely to be the final chapter in this debate,” he said.
He pointed to several issues that remain unresolved. These include whether a genuine purchaser should bear the consequences of a supplier’s failure, whether tax authorities should first pursue recovery from the supplier before taking action against the buyer, whether additional procedural safeguards should be introduced, and how cases involving retrospective cancellation of GST registrations should be handled.
Several High Courts across India have dealt with disputes involving blocked Input Tax Credit, fake invoices, cancelled registrations and supplier defaults since GST came into force. These cases have shaped different interpretations of the law, contributing to continuing litigation across the country.
Bhide expects future legal challenges to focus less on the wording of Section 16(2)(c) itself and more on how tax authorities apply the provision in individual cases.
“One thing is certain, the litigation surrounding this issue has undoubtedly become much tougher for the taxpayer!” he said.
For businesses, the judgment sends a clear message that maintaining internal compliance alone may no longer be enough to fully protect Input Tax Credit claims. Companies may need to strengthen supplier due diligence, monitor vendor behaviour more closely and review contractual safeguards to reduce potential tax risks.
The ruling is likely to influence future GST audits, assessments and commercial relationships, especially for businesses that depend heavily on large supplier networks. While the legal validity of Section 16(2)(c) now stands reinforced, the wider debate over balancing revenue protection with fairness to honest taxpayers is expected to continue before courts in the years ahead.