Supreme Court Clarifies Input Tax Credit (ITC) Eligibility under GST

For many businesses, one GST question has been a constant source of worry: Can you lose your Input Tax Credit (ITC) even after paying GST to your supplier, simply because the supplier failed to deposit that tax with the Government?

The Supreme Court has now delivered a series of rulings in 2026 that provide much-needed clarity. While the decisions don’t answer every question in favour of taxpayers, they do explain where the law stands and when genuine businesses can still get protection.

The Core Issue: Section 16(2)(c)

Section 16(2)(c) of the CGST Act says that a buyer can claim ITC only if the supplier has actually paid the GST collected to the Government. The purpose of this rule is understandable—it prevents people from claiming tax credit where no tax has actually reached the Government.

However, in real life, this creates a problem for honest businesses. A buyer may have:

• purchased genuine goods or services,
• paid the invoice along with GST, and
• completed the transaction in good faith.

Yet, if the supplier later fails to deposit the GST, disappears, or turns out to be a fake business, the tax department may deny the buyer’s ITC.

Businesses have argued for years that this is unfair because buyers have no direct control over whether a supplier deposits the tax after collecting it. Different High Courts gave different answers, which eventually brought the issue before the Supreme Court.

The Constitutional Validity Question Settled

In Bhandari Scrap Traders v. Union of India, the Supreme Court refused to interfere with the Gujarat High Court’s decision in Maruti Enterprise v. Union of India.

In simple terms, this means the Court has accepted that Section 16(2)(c) is valid as it is written.

The result is straightforward: if the supplier has not actually paid the GST to the Government, the buyer cannot claim ITC merely because they acted honestly.

This is important because another High Court—the Tripura High Court in Sahil Enterprises v. Union of India—had taken a more taxpayer-friendly view. It had said that genuine buyers should not lose ITC unless they were involved in fraud or collusion.

An appeal against the Tripura decision is still pending before the Supreme Court. However, after the Supreme Court’s refusal to interfere with the Gujarat High Court’s judgment, the stricter interpretation now carries greater weight.

But Genuine Buyers Aren’t Left Without Protection

The Supreme Court has also made it clear that honest taxpayers are not without protection in every situation. In Additional Commissioner Grade 2 & Anr. v. Safecon Lifescience Private Limited, the Court allowed the Allahabad High Court’s decision in favour of the taxpayer to stand.

This case dealt with a different issue.

Sometimes a supplier’s GST registration is cancelled retrospectively, meaning the cancellation takes effect from an earlier date. Buyers often have no way of knowing this at the time they make a genuine purchase.

The Court accepted that ITC should not automatically be denied just because the supplier’s registration was cancelled later with retrospective effect. Unless the department can show that the buyer was involved in fraud, wilful misstatement, or suppression of facts, the buyer should not lose ITC for this reason alone.

Reading the Two Strands Together

At first glance, these rulings may seem contradictory. One appears strict, while the other offers protection to taxpayers.

But together, they draw a clear distinction:

• Non-payment of GST by the supplier (Section 16(2)(c)): If the supplier never deposits the GST collected, the law currently says the buyer cannot claim ITC, even if the buyer acted honestly.
• Retrospective cancellation of GST registration: If the supplier’s registration is cancelled later for reasons beyond the buyer’s knowledge or control, that alone does not mean ITC should be denied, provided the buyer was not involved in fraud or collusion.

In other words, the Supreme Court has distinguished between tax that was never paid and a registration issue that arose after a genuine transaction.

What This Means for Businesses

1. Check your suppliers carefully. Don’t just verify that they have a GST registration. Wherever possible, review whether they are regularly filing returns and paying GST.
2. Keep complete records. Preserve invoices, e-way bills, proof of payment, delivery documents, and other records that show the transaction was genuine.
3. Know the limits of the Safecon ruling. It protects buyers from the consequences of a supplier’s retrospective registration cancellation, but it does not remove the requirement that the supplier must have actually paid the GST under Section 16(2)(c).
4. Keep an eye on future developments. Since the appeal against the Tripura High Court’s judgment is still pending, the law may continue to evolve.

The Takeaway

• The Supreme Court has made one thing clear: under the current GST law, ITC is closely linked to whether the supplier has actually paid the tax to the Government.
• At the same time, the Court has recognised that genuine businesses should not automatically be punished because a supplier’s GST registration is cancelled retrospectively for reasons beyond the buyer’s control.

For businesses, the practical lesson is simple. Choosing reliable suppliers and maintaining strong documentation are no longer just good business practices—they are essential steps to protect your valuable Input Tax Credit.