Supreme Court Upholds Section 16(2)(c) — What Every GST-Registered Buyer Must Know Now

ByJigar Shah

Hon. Supreme Court has closed the door on the “honest buyer” defence. Here’s what changes for your ITC claims and what precautions to take

Hon. Supreme Court order dated 24.07.2026 (SLP(C) No. 23931/2026 & connected matters) — affirmed the Gujarat High Court’s judgment dated 01.05.2026 (Maruti Enterprise vs. Union of India, and 50 connected petitions), which had upheld Section 16(2)(c) of the CGST Act, 2017 as valid.

1. What does Section 16(2)(c) say?

You can claim Input Tax Credit (ITC) on a purchase only if your supplier has actually deposited that tax with the Government — not merely because you have paid GST to your supplier and hold a valid invoice.

2. What has Hon. Supreme Court now decided?

  • The Supreme Court has upheld Section 16(2)(c) as constitutionally valid and refused to soften (“read down”) it in favour of buyers.
  • This means: even a genuine, bona-fide buyer who has paid GST to a properly registered supplier can still be denied ITC — and asked to reverse it with interest — if that supplier fails to deposit the tax with the Government.
  • Being an honest buyer is necessary, but it is no longer, by itself, a shield against ITC denial for a supplier’s default.

3. Two views before the Courts — which one won?

  • Relied upon: The Gujarat High Court’s view — that GST has a built-in safety net for buyers (explained below), so the law need not be diluted, and denial of ITC for a supplier’s default is not unfair or unconstitutional.
  • Rejected: The more buyer-friendly view taken by the Tripura High Court (following an older Delhi High Court ruling under the earlier VAT law) — that an honest buyer should never lose credit for a seller’s fault. The Supreme Court held this VAT-era reasoning does not fit the GST framework.

4. Reasoning of Hon. Supreme Court?

  • GST already gives buyers a partial safety net: if the supplier eventually pays the tax, the buyer can re-claim ITC that was earlier reversed (Section 41(2) read with Rule 37A).
  • GST is destination-based — credit crossing State lines without actual tax payment would force one State to transfer money it never received to another, causing real revenue loss (unlike the old VAT system).
  • The law places the burden of proving ITC eligibility — including actual tax payment by the supplier — on the buyer (Section 155).
  • The Government can separately proceed against the defaulting supplier for recovery (Sections 73/74); but that does not entitle the buyer to keep the credit in the meantime.

5. Precautions buyers should now take to protect ITC

  • Deal with well-established, regularly return-filing suppliers; be cautious with new or unusually cheap vendors.
  • Before onboarding a new supplier and periodically thereafter, check GST registration status and return-filing track record on the GST portal.
  • Reconcile GSTR-2B against your purchase register every month; follow up immediately on mismatches — don’t wait for a notice.
  • Remember GSTR-2A/2B only shows that an invoice was uploaded — it is not proof that the supplier actually deposited the tax.
  • Keep a strong documentary trail — PO, invoice, e-way bill, delivery proof, and payment through banking channels (avoid cash).
  • Build a tax-indemnity / default clause into vendor contracts, making the supplier liable to compensate you if they collect GST but fail to deposit it.
  • If a supplier defaults, reverse the ITC as required (to avoid interest) and track re-availment once the supplier eventually pays — don’t treat it as a permanent loss without follow-up.
  • Where ITC is lost to a defaulting supplier, pursue recovery directly from that supplier (civil remedy) — the law will not do this for you.

Full copy of the Hon. Supreme Court is available on demand. Please mail to us

Limitation: Views expressed in this blog are personal views of the author. This blog is for educational purpose as part of knowledge sharing and should not be construed as opinion of the author on the subject.

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