What Section 16(2)(c) Actually Says

Section 16 of the CGST Act, 2017 governs eligibility for input tax credit. Sub-section (2) lists the conditions that must all be satisfied before you can take the credit — it opens with a non-obstante clause, which means these conditions override everything else in the section.

Section 16(2)(c) is the third of them, and it reads to the effect that credit is available only where the tax charged on that supply has actually been paid to the Government, either in cash or through utilisation of admissible input tax credit.

Read the list of conditions together and the structural problem becomes obvious.

Four of those conditions sit within your reach. You control whether you hold a valid invoice. You control whether the goods actually arrived. You control whether you paid your vendor within 180 days, which the second proviso to Section 16(2) requires. But clause (c) turns on an act performed by somebody else, in a return you cannot see, on a date you cannot influence.

That asymmetry is the whole controversy. A buyer can do everything the law asks and still lose the credit because a supplier in another state, whose finances are none of the buyer’s business, filed GSTR-1 to report the invoice but never filed GSTR-3B to pay the tax.

The Case: Bhandari Scrap Traders Explained

The facts were unremarkable, which is precisely why the outcome matters.

The petitioners had bought goods, received them, held valid tax invoices showing GST, and paid their suppliers. Credit was denied on one ground alone: the suppliers had not deposited the tax with the Government.

Before the Gujarat High Court they argued that Section 16(2)(c) was arbitrary and violated Articles 14, 19(1)(g), 265 and 300A of the Constitution, because it punished a purchaser for a default entirely outside their control. In the alternative, they asked the Court to read the provision down so that it would bite only where there was fraud, collusion or connivance between supplier and purchaser.

They also made a narrower, more technical argument that deserves attention: that compliance with clauses (a), (aa), (b) and (ba) of Section 16(2) already establishes the genuineness of a transaction, so clause (c) adds nothing except exposure to another party’s misconduct.

The Gujarat High Court rejected the challenge on 1 May 2026 and expressly declined to follow the Tripura High Court, which had read the provision down five months earlier. The petitioners took the matter to the Supreme Court.

The Supreme Court dismissed the Special Leave Petitions. It recorded that the High Court was fully justified in holding that no grounds were made out either to declare Section 16(2)(c) unconstitutional or to read it down, and stated that it found itself in complete and respectful agreement with the Gujarat High Court, affirming the judgment.

Why the Court Upheld Section 16(2)(c)

Three strands of reasoning carried the day, and understanding them tells you which arguments are now dead and which still have life.

GST Is Not VAT, So VAT Precedents Do Not Travel

Taxpayers had leaned heavily on the Delhi High Court’s 2018 decision in On Quest Merchandising India Pvt. Ltd., which read down Section 9(2)(g) of the Delhi VAT Act — a provision materially similar to Section 16(2)(c) — to exclude bona fide purchasers. That reading had been affirmed by the Supreme Court, and it was the sturdiest plank in the taxpayer case.

The Gujarat High Court dismantled the analogy, and the Supreme Court endorsed the demolition. The key structural difference is the IGST settlement mechanism. Under GST, credit moves across State borders — a buyer in Maharashtra claims credit on tax that a supplier in Gujarat was meant to pay, and the two States settle between themselves through the IGST pool.

If a recipient could claim credit on tax that was never actually deposited, the originating State would end up transferring revenue it had never received. That, the courts held, would undermine the destination-based architecture on which GST rests. VAT was a single-State tax with no equivalent settlement problem, which is why the older reasoning cannot simply be imported.

Input Tax Credit Is a Concession, Not a Right

The second strand is doctrinal. The courts held that ITC is not a vested or constitutional right but a statutory concession, available strictly on the conditions Parliament has prescribed. Where the legislature has designed a complete scheme, a court cannot rewrite it merely because the scheme operates harshly in an individual case.

The Supreme Court framed the constitutional question narrowly and deliberately: not whether Section 16(2)(c) can produce unfair outcomes, but whether the legislative condition itself is constitutionally valid. On that framing, hardship in a particular case is a policy problem, not a ground for striking down a provision.

The Gujarat High Court also pointed to the Statement of Objects and Reasons of the CGST Act, which links the availability of credit to taxes paid — evidence that actual payment was always meant to be foundational rather than incidental.

The Buyer Is Not Left Without a Remedy

The third strand did the heaviest lifting, and it is the one businesses should understand best. The courts held that the recipient is not remediless, because the statute itself provides a route back.

Under Section 41(2) read with Rule 37A, a buyer who reverses credit because the supplier defaulted may re-avail that credit once the supplier eventually pays. Meanwhile the Revenue retains full power to recover the tax from the defaulting supplier under Sections 73 and 74.

In other words: the credit is suspended, not destroyed. That characterisation is what allowed the Court to describe the scheme as complete and balanced.

Eight Years of Conflicting Rulings

To understand why this judgment matters so much, look at the mess it replaced. Until July 2026, the answer to whether a bona fide buyer could keep the credit depended largely on which High Court had jurisdiction.

The divergence created a genuinely absurd position for any business operating across states. An identical transaction — same invoice, same defaulting supplier, same evidence — could succeed in Tripura and fail in Gujarat. Multi-state groups were running parallel litigation strategies on the same facts.

That is now resolved in one direction. The Tripura High Court’s approach in Sahil Enterprises, which had read Section 16(2)(c) down to apply only to transactions that were not bona fide, has been effectively displaced. A separate Special Leave Petition arising from that decision remains pending before the Supreme Court, but its prospects are considerably weakened by the affirmation of the Gujarat view.

What Is Settled and What Is Still Open

Careful reading matters here, because a great deal of commentary has treated the judgment as closing every question. It does not.

The constitutional challenge is over. Arguing that Section 16(2)(c) is ultra vires, or that it should be read down for honest purchasers as a class, is no longer a viable line before any forum in India.

But several genuinely contested issues survive:

• Sequencing of recovery. Must the department first attempt recovery from the defaulting supplier under Sections 73 or 74 before proceeding against the buyer? The judgment relies on the availability of that machinery without holding that it must be exhausted first. Several High Courts have taken a sympathetic view on this, and the point remains arguable.
• Retrospective cancellation of registration. Where a supplier’s GST registration is cancelled with retrospective effect, months after a genuine purchase, the buyer’s position raises questions the judgment does not address.
• Procedural fairness. Whether a buyer is entitled to notice, particulars and an opportunity to be heard before a large reversal is imposed remains a live administrative-law issue, distinct from constitutional validity.
• Fraud versus default. The judgment concerns supplier non-payment. Cases built on allegations of bogus or non-existent suppliers stand on different evidentiary ground, and genuineness of the transaction remains centrally relevant there.

And there is the Court’s own postscript. Having upheld the provision, the Bench urged the Government to reconsider the difficulties honest purchasers face — specifically calling for a robust, technology-driven mechanism for real-time, invoice-level verification of supplier tax payments, and for faster recovery action against defaulting suppliers.

Your Safety Valve: Section 41(2) and Rule 37A

Because the entire judgment rests on the reversal-and-re-availment machinery, you need to know exactly how that machinery runs.

Rule 37A was inserted into the CGST Rules by Notification No. 26/2022 – Central Tax dated 26 December 2022, precisely to operationalise Section 16(2)(c) and Section 41(2). It sets a two-date clock:

Work an example. You claim ₹4,20,000 of credit on invoices from a supplier during FY 2025-26. The supplier reports every invoice in GSTR-1, so everything appears cleanly in your GSTR-2B. But they never file GSTR-3B. By 30 September 2026 the tax remains unpaid, so you must reverse the ₹4,20,000 in your GSTR-3B filed by 30 November 2026. Reverse on time and there is no interest. Miss it and interest at 18% runs on the full amount.

If that supplier files the pending GSTR-3B in, say, March 2027, you re-avail the ₹4,20,000 in a subsequent GSTR-3B. You have lost the use of the money for roughly six months. You have not lost the money.

For the mechanics of reading your credit statement correctly before any of this arises, our guide to GSTR-2B vs GSTR-2A sets out which statement legally governs your claim, and the Section 16(4) ITC deadline guide covers the separate time limit for claiming credit in the first place.

Who Section 16(2)(c) Hits Hardest

The exposure created by Section 16(2)(c) is not evenly distributed. Some business models are structurally more vulnerable, and recognising yours is the first step to managing it.

Businesses buying from small, unorganised suppliers. Scrap dealing, textiles, construction materials, agricultural trading and job-work sectors deal with a long tail of small vendors whose filing discipline is erratic. The case that reached the Supreme Court was itself a scrap trading business, which is not a coincidence.

Businesses with thin margins and heavy input costs. If your gross margin is eight per cent and your input credit is eighteen per cent of purchase value, a reversal does not dent profit — it erases it. The reversal is measured against turnover, not against your margin.

Businesses with concentrated supplier exposure. One large supplier accounting for forty per cent of purchases is a single point of failure. When that supplier hits a cash crunch and stops filing GSTR-3B while continuing to file GSTR-1, everything looks normal in your GSTR-2B until the Rule 37A clock strikes.

Businesses that treat GSTR-2B as proof of payment. This is the most widespread and most dangerous misconception in Indian GST compliance, and the judgment has made it expensive.

Why This Judgment Does Not Change the Law, Only the Odds

It is worth being precise about what actually shifted on 24 July 2026. Section 16(2)(c) has read the same way since 1 July 2017. No amendment was made, no rate changed, and no new obligation was imposed on any taxpayer.

What changed is the availability of a defence. Until this judgment, a business facing reversal could point to a respectable body of High Court authority — Delhi, Tripura, and decisions under the earlier VAT regime in Karnataka and elsewhere — and argue that an honest purchaser should be protected as a matter of principle. That argument had a real success rate, and it shaped how many businesses priced the risk of dealing with small suppliers.

That defence is now gone at the level of principle. The exposure that always existed on paper has become the exposure that will be enforced in practice. Businesses that had implicitly relied on the courts as a backstop need to replace that backstop with vendor controls, because there is nothing else standing between them and a reversal.

Seven Controls That Cut Your Section 16(2)(c) Risk

You cannot make a supplier pay their tax. You can materially change the probability that you are dealing with one who will, and materially shorten the time it takes to spot one who has not.

Taking those seven controls in turn:

1. Verify GSTIN status and filing history before onboarding. The Search Taxpayer facility on gst.gov.in shows whether a registration is active and displays a return-filing table. A vendor with a visible pattern of late or missing returns is telling you something before you place the first order.

2. Score vendors on GSTR-3B punctuality, not GSTR-1. This is the control most compliance teams get wrong. Build your vendor risk rating on the filing status of GSTR-3B, because that is the return that discharges the tax.

3. Put a tax indemnity clause in your purchase contracts. If credit is reversed because of the supplier’s default, the contract should let you recover the reversal, the interest and any penalty. This does not stop the reversal, but it converts a tax loss into a contractual claim.

4. Withhold the tax component until the credit appears. Increasingly common with higher-risk vendors: pay the taxable value on normal terms and release the GST portion only once the invoice shows in GSTR-2B. Commercially aggressive, but for a vendor with a poor filing record it is proportionate.

5. Reconcile GSTR-2B against your purchase register every month. Not quarterly, not at year end. A missing invoice found in month one can be chased while the commercial relationship still has leverage. Found in month eleven, you are negotiating with someone who already has your money. Our free GST ITC reconciliation tool will match GSTR-2B against your purchase register in the browser.

6. Use the Invoice Management System actively. IMS lets you accept, reject or keep an invoice pending before it hardens into your GSTR-2B. Acting at that stage is far cheaper than reversing later.

7. Preserve evidence of genuineness. E-way bills, transport documents, weighbridge slips, delivery challans and bank payment proof. This will not defeat a straightforward Section 16(2)(c) reversal, but it is decisive in the different and far more serious situation where the department alleges the supplier was bogus.

If You Already Have a Demand or a Pending Appeal

Many businesses are holding show-cause notices or appeals built on the argument that the Supreme Court has now rejected. Some practical observations.

Reassess any case resting solely on the read-down argument. If your defence was that Section 16(2)(c) should not apply to a bona fide purchaser as a matter of constitutional principle, that argument is gone. Continuing to run it invites interest accumulation and, potentially, an adverse costs impression.

Separate your defences. Many notices bundle several allegations. A demand alleging that the supplier was non-existent and the transaction fabricated is a different animal from one alleging that a real supplier failed to pay. The first is fought on evidence of genuineness and is unaffected by this judgment. The second is now much harder.

Check whether the tax was in fact later paid. If the defaulting supplier eventually filed the pending GSTR-3B, the foundation of the demand may have disappeared. Re-availment under Rule 37A becomes available, and the proceeding may be capable of being closed on that footing.

Consider the procedural grounds that survive. Limitation, the validity of the notice, whether Section 73 or Section 74 was correctly invoked, adequacy of reasons, and whether recovery was attempted against the supplier — these are untouched by the judgment.

If you are dealing with a notice, our guide on GST notices and how to reply covers the procedural framework in detail.

Three Situations, Decided

Key Takeaways

Frequently Asked Questions

What did the Supreme Court decide about Section 16(2)(c)?

In Bhandari Scrap Traders v. Union of India, decided on 24 July 2026, the Supreme Court dismissed a batch of Special Leave Petitions and affirmed the Gujarat High Court judgment in Maruti Enterprise. It held that Section 16(2)(c) of the CGST Act is neither unconstitutional nor liable to be read down, confirming that input tax credit is unavailable to a recipient unless the supplier has actually paid the tax to the Government.

Can I lose input tax credit even if I paid my supplier in full?

Yes. Payment to your supplier satisfies a different condition — the 180-day requirement in the second proviso to Section 16(2). Clause (c) requires that the tax reach the Government. If your supplier collected GST from you and never deposited it, the credit becomes reversible regardless of your own conduct.

Does an invoice appearing in GSTR-2B mean the supplier paid the tax?

No, and this is the most costly misconception in this area. An invoice appears in your GSTR-2B once the supplier files GSTR-1, which merely reports the transaction. The tax is discharged only when the supplier files GSTR-3B. A supplier can populate your GSTR-2B perfectly for months while paying nothing.

Is the reversed credit lost permanently?

Not necessarily. Under Section 41(2) read with Rule 37A, once the supplier eventually furnishes the pending GSTR-3B, you may re-avail the reversed credit in any subsequent GSTR-3B. The Section 16(4) time limit does not block that re-claim. In practice the credit is lost only where the supplier never files — for instance because the business has closed or become insolvent.

When must I reverse credit under Rule 37A?

If your supplier has not filed the relevant GSTR-3B by 30 September following the financial year in which you availed the credit, you must reverse it in a GSTR-3B filed on or before 30 November of that same year. Reverse by that date and no interest applies. Miss it and interest runs under Section 50 at 18% per annum.

Does this judgment apply to cases of fake or bogus suppliers?

Those cases stand on different ground. This judgment concerns non-payment of tax by a real, registered supplier in a genuine transaction. Where the department alleges the supplier was non-existent or the transaction fabricated, the dispute turns on evidence of genuineness — e-way bills, transport records, delivery documentation and the banking trail — and typically involves Section 74 rather than Section 73.

Can the department recover from me instead of chasing the supplier?

The judgment upholds the condition without expressly deciding whether recovery must first be attempted against the defaulting supplier. Sections 73 and 74 give the Revenue full power to proceed against the supplier, and the Gujarat High Court referred to that machinery when holding the recipient is not remediless. Whether the department must exhaust it first remains arguable and has been raised successfully before several High Courts.

What did the Court say about fixing this problem?

Having upheld the provision, the Bench urged the Government to reconsider the difficulties honest purchasers face. It specifically called for a robust technology-driven mechanism enabling real-time, invoice-level verification of whether a supplier has paid tax, and for prompt recovery action against defaulting suppliers. That observation is not binding, but it signals the direction of expected administrative reform.

Is the Tripura High Court ruling in Sahil Enterprises still good law?

Its authority is substantially weakened. The Tripura High Court had read Section 16(2)(c) down to apply only where a transaction was not bona fide. The Gujarat High Court expressly disagreed, and the Supreme Court affirmed the Gujarat view while noting that Tripura had not undertaken the same detailed analysis. A separate Special Leave Petition arising from Sahil Enterprises remains pending, but the position it represents is now considerably diluted.

Conclusion

The judgment on Section 16(2)(c) is not a surprise so much as a clarification, and the clarification is unwelcome for buyers. Eight years of hoping that courts would eventually protect the honest purchaser as a class have ended. The condition stands, the VAT-era arguments are spent, and the burden of a supplier’s default sits, at least in the first instance, with the person who bought from them.

What the judgment does not do is leave you helpless. It rests explicitly on the reversal-and-re-availment machinery in Rule 37A, which means the credit is a cash-flow problem rather than a permanent loss in every case where the supplier eventually pays. That distinction is worth internalising, because it changes what you should be doing when a reversal lands: gathering evidence of subsequent payment rather than drafting a constitutional argument.

The durable lesson is operational. Businesses that monitor GSTR-3B filing rather than GSTR-2B appearance, that reconcile monthly rather than annually, and that write tax indemnities into their purchase contracts will absorb this ruling with an inconvenience. Businesses that do none of those things will absorb it as a loss. Nothing in Section 16(2)(c) has changed since 2017 — what changed on 24 July 2026 is that there is no longer any prospect of a court rescuing you from it.

Official Sources

• GST portal — Search Taxpayer, return filing status and GSTR-2B
• CBIC tax information portal — bare text of the CGST Act and Rules including Rule 37A
• Central Board of Indirect Taxes and Customs — notifications and circulars