Supreme Court Upholds Section 16(2)(c) of CGST Act: ITC Remains Conditional on Supplier's Tax Payment

Under the Goods and Services Tax regime, Section 16 of the Central Goods and Services Tax Act, 2017 (CGST Act) governs both the eligibility and the conditions for claiming Input Tax Credit (ITC). While Section 16(1) of the CGST Act defines which registered persons are eligible to avail ITC, the four clauses under Section 16(2) — namely clauses (a), (b), (c), and (d) — prescribe the conditions that must be cumulatively satisfied before such credit can be claimed.

Among these, Section 16(2)(c) of the CGST Act is arguably the most contested provision. It mandates that the purchasing dealer can avail ITC only if the supplier has actually paid the tax charged on the supply to the Government. This condition has generated significant litigation across multiple High Courts, with conflicting outcomes on whether the provision is constitutionally valid, whether it can be "read down," and whether bona fide purchasers deserve protection when their suppliers default on tax payment.

The debate reached its logical conclusion when the Supreme Court of India, in Bhandari Scrap Traders vs UOI [SLP (C) No. 23931 of 2026], decided on July 24, 2026, affirmed the constitutional validity of Section 16(2)(c) of the CGST Act by endorsing the reasoning of the Gujarat High Court in Maruti Enterprise Vs UOI [R/Special Civil Application No. 18080 of 2023 and allied matters]. This article presents a structured analysis of the Supreme Court's ruling, the diverging High Court positions, and the practical steps assessees should adopt to safeguard their ITC entitlements.

The Diverging High Court Positions on Section 16(2)(c)

Before the Supreme Court's pronouncement, Indian High Courts were divided into two broad camps on this issue.

High Courts Upholding Constitutional Validity of Section 16(2)(c)

Several High Courts declined to strike down or read down Section 16(2)(c) of the CGST Act, holding it to be constitutionally sound. These include:

  • Kerala High Court in Trade Links v. UOI (2024 SCC OnLine (Ker.) 2744) and Nahasshukoor and another v. Assistant Commissioner (2023 SCC online Ker 11369)
  • Patna High Court in Aastha Enterprises vs. State of Bihar (2023 SCC Online Pat 4395)
  • Madhya Pradesh High Court in M/s Shree Krishna Chemicals vs. UOI (2025 (2) TMI 1006 (M.P))
  • Madras High Court in M/s Baby Marine (Eastern) Exports v. UOI and ors (2025 (8) TMI 791 (Madras))

These decisions consistently held that the GST framework is structurally distinct from earlier tax regimes such as VAT or Central Excise, and that ITC, being a statutory concession, must be claimed strictly in accordance with the conditions laid down by the legislature.

High Courts That Read Down or Favoured the Purchasing Assessee

On the other side, certain High Courts interpreted Section 16(2)(c) more liberally, protecting bona fide purchasers from supplier defaults:

a) Gauhati High Court in National Plasto Moulding vs State of Assam [(2024) 8 TMI 836]

The Gauhati High Court found the matter covered by the Delhi High Court's decision in On Quest Merchandising India Private Limited [2018] 10 GSTL 182 (Del), which was approved by the Supreme Court in Arise India 2022 (60) GSTL 215 (SC). The court read down Section 16(2)(c) of the CGST Act, holding that denial of ITC to a bona fide purchasing dealer solely on account of the selling dealer's failure to deposit tax collected was not sustainable where the purchaser had genuinely transacted with a validly registered supplier.

b) Tripura High Court in Sahil Enterprises vs UOI [(2026) 154 GSTR 108 (Tri.)]

After examining the ratio in On Quest Merchandising India (P) Ltd. (supra) and scrutinising Section 16(2)(c) of the CGST Act, the Tripura High Court also applied the doctrine of reading down, limiting the operation of the provision so as not to penalise bona fide recipients for their supplier's non-compliance.

c) Karnataka High Court in M/s. Instakart Services Pvt. Ltd. vs. Union of India [Writ Petition No. 4917 of 2021]

The Karnataka High Court similarly leaned in favour of the purchasing assessee in circumstances involving genuine transactions with registered suppliers.