Can a buyer lose input tax credit because the supplier did not pay GST?

Section 16(2)(c) conditions credit on the tax having been paid to the government, but several High Courts, including the Madras High Court in D.Y. Beathel Enterprises (2021) and the Calcutta High Court in Suncraft Energy (2023), have held that where the buyer has paid the tax to a registered supplier against a genuine invoice, the department must first proceed against the supplier and can recover from the buyer only in exceptional cases such as collusion or a missing supplier. Some High Courts have taken the opposite view, and the Supreme Court has not finally decided the question.

What should a business do if it receives a notice for mismatched or unpaid supplier tax?

Respond within the time allowed with the documents establishing the genuineness of the purchase and the supplier's registration, cite the CBIC's press release of 4 May 2018 and its circulars on mismatches for the early years, ask the department to confirm what action it has taken against the supplier, and, if a demand is confirmed, appeal within three months under Section 107 with the required pre-deposit.

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Input Tax Credit Under GST Cannot Be Denied for Supplier's Default Alone: Madras High Court on Section 16 CGST Act

Q: What are the conditions for claiming input tax credit under Section 16 of the CGST Act?

The buyer must hold a tax invoice or debit note, the supplier must have reported the invoice in its outward supply return so that it appears in the buyer's GSTR-2B, the buyer must have received the goods or services, the tax must have been paid to the government, the buyer must have filed its return, and the supplier must be paid within 180 days of the invoice. The credit must be claimed within the time limit in Section 16(4), as extended by Section 16(5) for the early years of GST.

Q: What documents prove a genuine purchase for input tax credit?

The tax invoice, the e-way bill, transport documents and goods receipt records, proof of payment through banking channels including the tax component, the supplier's registration status at the time of supply, and the reflection of the invoice in GSTR-2A or GSTR-2B. Under Section 155 the burden of proving eligibility for credit lies on the person claiming it.

Buyers who paid tax to a registered supplier cannot be penalised for the supplier's failure to deposit it.

Meghna SharmaTax editor

Published 25 October 2026, 2:00 pm IST
4 min read

The Madras High Court, which held that input tax credit cannot be denied for a supplier's default alone — The Madras High Court. Photograph: The Counsel

Case details

Court: Madras HC Madras High Court
Case: Sri Ganesh Traders v. Deputy Commissioner (ST)
Bench: Single judge
Citation: W.P. 22810 of 2025
Decided: 13 October 2026

Key holdings

A buyer who holds a valid invoice, has received the goods and has paid the supplier, including the tax, through banking channels cannot be denied credit merely because the supplier did not remit the tax.
The department must first proceed against the registered supplier who collected the tax; recovery from the buyer is reserved for exceptional cases such as collusion or a non-existent supplier.
The demand under Section 73 is quashed; the department may proceed afresh after examining the supplier.

CHENNAI — A buyer who has paid GST to a registered supplier against a valid tax invoice cannot be denied input tax credit merely because the supplier failed to deposit the tax, the Madras High Court has held, quashing a demand of ₹38 lakh with interest and penalty raised on a Coimbatore trader for the financial years 2019-20 and 2020-21 and directing the department to proceed against the supplier first. The single judge allowed the writ petition on 13 October in Sri Ganesh Traders v. Deputy Commissioner (ST).

"The buyer did everything the law asked. The law should keep its side of the bargain," the court said.

Section 16 of the CGST Act: the conditions for credit

Section 16(2) of the Central Goods and Services Tax Act, 2017 lists the conditions for input tax credit: a tax invoice or debit note; reporting of the invoice by the supplier in its outward supply return and its appearance in the buyer's GSTR-2B, a condition inserted with effect from January 2022; receipt of the goods or services; the tax charged having been actually paid to the government, in cash or through credit, under Section 16(2)(c); and the buyer having filed its return. The second proviso reverses the credit if the supplier is not paid within 180 days. Section 16(4) imposes a time limit for claiming credit, which Section 16(5), inserted in 2024, relaxed for the financial years 2017-18 to 2020-21. Section 155 places the burden of proving eligibility on the person claiming credit.

Section 16(2)(c) is the provision under which the department denies credit where the supplier's return shows no payment. Read literally, it makes the buyer's credit depend on the supplier's conduct, over which the buyer has no control.

What the court held

The purchase was genuine. The petitioner produced the invoices, the e-way bills, the transporter's records, the goods receipt entries and bank statements showing payment of the invoice value including tax. The supplier was registered and its registration was active on the dates of supply; it was cancelled only later, with retrospective effect.
The supplier was never examined. The department had issued no notice to the supplier, made no attempt to recover the tax from it and could not say whether proceedings had been initiated against it. The court held, following its own decision in D.Y. Beathel Enterprises v. State Tax Officer (2021), that recovery from the buyer without examining the supplier who collected the tax is not sustainable.
The department's own guidance. The CBIC's press release of 4 May 2018 stated that there would be no automatic reversal of credit from the buyer on non-payment by the supplier, that recovery would be made from the supplier, and that reversal from the buyer would be an option only in exceptional situations such as a missing dealer, closure of business or the supplier lacking assets. The court held that the department is bound by its own statement of policy.
Consistent authority. The court relied on the Calcutta High Court's decision in Suncraft Energy v. Assistant Commissioner (2023), against which the Supreme Court declined to interfere, and on the Delhi High Court's reading of the corresponding provision of the Delhi VAT Act in Arise India (2017), which excluded bona fide purchasers from the consequence of the supplier's default.

The buyer did everything the law asked. The law should keep its side of the bargain.
From the judgment

Where the line is

The judgment does not hold that Section 16(2)(c) is unenforceable. It holds that the provision operates in sequence: the supplier who collected the tax is the first target, and the buyer is reached only where the supplier cannot be — because it does not exist, has disappeared or colluded with the buyer. Where the supplier was fictitious, the invoices were issued without supply, or the buyer's payment was routed back, credit is denied and penalties under Sections 74, 122 and, in serious cases, prosecution under Section 132 follow. Not every High Court agrees even on the sequence: the Patna High Court in Aastha Enterprises (2023) held that the buyer's credit depends on the supplier's payment, full stop. The Supreme Court has dismissed special leave petitions in some of these cases without laying down the law, so the question remains open at the national level.

What it means for businesses

Verify the supplier before you pay. Check registration status on the GST portal at the time of each supply and keep a dated record; a supplier whose registration is later cancelled retrospectively was still registered when you dealt with it.
Pay through the bank. Proof of payment of the invoice value including tax is the single most important document in a Section 16(2)(c) dispute.
Reconcile GSTR-2B every month. For periods after January 2022, credit depends on the invoice appearing in GSTR-2B; chase suppliers for unreported invoices before the return deadline.
Put compliance in the contract. Indemnities and payment holdbacks tied to the supplier's filing give a commercial remedy the statute does not.
Answer notices with evidence. A reply to a notice in Form DRC-01 should attach the purchase trail, cite the 2018 press release and the circulars on mismatches for the early years, and ask what the department has done about the supplier.

Frequently asked questions

What are the conditions for claiming input tax credit under Section 16?

A tax invoice or debit note; the invoice reported by the supplier and reflected in GSTR-2B; receipt of the goods or services; the tax paid to the government; the buyer's return filed; and the supplier paid within 180 days. Credit must be claimed within the Section 16(4) time limit, as extended by Section 16(5) for the early years.

Can a buyer lose credit because the supplier did not pay GST?

Section 16(2)(c) conditions credit on payment of the tax to the government, but the Madras and Calcutta High Courts have held that where the buyer paid a registered supplier against a genuine invoice, the department must proceed against the supplier first and can reach the buyer only in exceptional cases. Some High Courts disagree, and the Supreme Court has not finally decided the question.

What documents prove a genuine purchase?

The invoice, e-way bill, transport and goods receipt records, bank proof of payment including tax, the supplier's registration status at the time of supply, and the invoice's reflection in GSTR-2A or GSTR-2B. Under Section 155 the burden of proof is on the claimant.

What should a business do on receiving a notice for unpaid supplier tax?

Reply in time with the purchase trail, cite the CBIC's 2018 press release and mismatch circulars, ask what action has been taken against the supplier, and appeal any confirmed demand within three months under Section 107 with the pre-deposit.

The Counsel will report any appeal by the department to a Division Bench. Businesses facing credit reversal for a supplier's default should take advice from a qualified GST practitioner before responding to the notice.

Meghna Sharma

Tax editor

Meghna covers GST, direct tax and customs litigation.

This report is for general information only and does not constitute legal advice. Readers should consult a qualified lawyer about their own circumstances. Case citations are to The Counsel Reports (TCR) unless otherwise stated.