Denial of ITC for Supplier Non-Payment: Validity of Section 16(2)(c) and the Litigation Record
This article reviews the dispute over denying input tax credit to a recipient because the supplier did not deposit the tax collected, from the Delhi VAT decisions to the Supreme Court orders of May and July 2026.
The question matters now because the Supreme Court has dismissed challenges to the validity of Section 16(2)(c) of the CGST Act, 2017 in the ordinary case of direct supplier default, while a related question on upstream defaults is still before it. Advice on a pending demand depends on both the High Court of the State and the position of the default in the supply chain.
The issue
Section 16(2) makes ITC available only on cumulative conditions: a valid tax invoice, receipt of the goods or services, a return filed under Section 39, and, under clause (c), actual payment to the Government of the tax charged. Since 2021, clause (aa) additionally requires the invoice details to appear in the recipient's GSTR-2B.
The recipient is thus exposed to a default over which it has no control. The question is whether that exposure is constitutionally valid, and if so, within what limits.
The governing law
Section 16(2)(c)CGST Act, 2017 conditions credit on payment of the tax by the supplier.Rule 37Aof the CGST Rules, 2017 provides that if the supplier has not filed its return by 30 September following the end of the financial year, the recipient must reverse the credit with interest, and may re-avail it when the supplier later complies. The interest on the reversal demand is at 18% per annum for the intervening period.Sections 41,73and74of the CGST Act, read withRule 37A, form the scheme of recovery and re-availment on which the Gujarat High Court relied.
The pre-GST Delhi VAT Act, 2004 contained a substantially identical bar in Section 9(2)(g), and Section 40A of that Act supplied machinery against collusive transactions.