Supreme Court Explains Who Bears the GST ITC Loss in Supplier Default Cases
On 24 July 2026, the Supreme Court brought a long-running constitutional battle close to an end. Dismissing a batch of special leave petitions led by Bhandari Scrap Traders v. Union of India [SLP(C) No 23931/2026], a Bench of Justice Sanjay Kumar and Sanjeev Sachdeva affirmed a Gujarat High Court decision and upheld the validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act)
In its own words, the Court found itself "in complete and respectful agreement with the views expressed by the High Court of Gujarat" and dismissed the petitions.
Consider an honest business. It buys goods from a registered supplier, pays the full price along with the GST charged on the invoice, and receives the goods. It has the tax invoice, it has taken delivery, and it has filed its returns. Months later, the department knocks on its door not because the buyer did anything wrong, but because the supplier never deposited the collected tax with the Government.
Under Section 16(2)(c), the buyer's input tax credit (ITC) is reversed, and it is asked to pay the tax again out of its own pocket. This is the injustice, real or perceived, that has been litigated across the country.
What Section 16(2)(c) actually requires
Section 16 of the CGST Act lists the conditions a registered person must satisfy to claim the ITC. Clause (c) of sub-Section (2) allows credit only if "the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit."
In other words, the buyer's right to credit is made to depend on an act that lies entirely in the supplier's hands. The buyer has no independent machinery to verify whether the seller has paid the tax, which is why the provision has repeatedly been attacked as arbitrary and as offending Articles 14, 19(1)(g), 265 and 300A of the Constitution of India.
A country divided: Two lines of High Court rulings
Before the Supreme Court stepped in, the High Courts had split into two camps. One line of decisions borrowed the reasoning developed under the Delhi Value Added Tax regime, particularly the Delhi High Court's ruling in On Quest Merchandising India Pvt. Ltd 2018 (10) G.S.T.L. 182 (Del.), which held that a bona fide buyer "cannot be expected to do the impossible" and that the department's remedy lies against the defaulting seller, not the innocent purchaser.
