GST law panel clears proposal to shield buyers' input tax credit from supplier defaults
A GST law committee cleared a proposal to protect buyers' input tax credit (ITC) even when the supplier fails to deposit collected tax with the government
Under the proposal, ITC would remain available to a buyer as long as the invoice is duly reported and payment is made through banking channels, shifting the recovery burden onto the defaulting supplier
Tax authorities would pursue the defaulting supplier directly for recovery instead of denying or reversing the buyer's credit
The proposal addresses a long-pending industry demand and is expected to be placed before the GST Council for approval
Section 16(2)(c) of the CGST Act, 2017 — The ITC Conditionality Problem
Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 makes a buyer's entitlement to input tax credit conditional on the tax charged on the supply having "actually been paid to the Government" by the supplier, in cash or through admissible ITC. Because a buyer has no control over whether a supplier actually deposits the collected tax, this provision has repeatedly been challenged as imposing an impossible compliance burden on bona fide purchasers.
Key Details
- Currently, if a supplier collects GST from a buyer but fails to deposit it, tax authorities can deny or reverse the ITC claimed by the buyer under Section 16(2)(c)
- High Courts have taken divergent views: some have upheld the provision's validity (holding ITC availability tied to actual tax payment), while others have read it down to deny credit only in cases of fraud or collusion, not bona fide transactions
- The constitutional validity of Section 16(2)(c) has been under challenge before the Supreme Court, which has left the substantive question open
- The current GST law panel proposal would decouple buyer ITC eligibility from the supplier's actual deposit of tax, conditioning it instead on invoice reporting (reflected in the buyer's GSTR-2B) and payment through banking channels
The cleared proposal is a legislative response to the exact judicial and industry controversy around Section 16(2)(c) — it would amend the underlying condition so that compliant buyers are no longer penalised for a supplier's default, aligning the law with the "bona fide purchaser" principle several courts have already applied.
GST Council — Constitutional Basis and Decision-Making (Article 279A)
The GST Council is a constitutional body established under Article 279A (inserted by the 101st Constitutional Amendment Act, 2016) to make recommendations on GST rates, exemptions, model laws, and administrative matters, ensuring cooperative federalism in indirect tax policy.
Key Details
- Composition: Union Finance Minister (Chairperson), Union Minister of State for Finance/Revenue, and the Minister in-charge of finance/taxation from each state
- Voting: every decision requires a majority of not less than three-fourths of weighted votes of members present and voting; the Centre's vote carries one-third weightage and all states together carry two-thirds weightage
- Any legislative amendment to Section 16(2)(c), such as the one now cleared by the law committee, would need to go through the GST Council's recommendation process before being enacted via an amendment to the CGST Act by Parliament
The proposal originates from a GST law committee (the technical body that vets legal amendments before they go to the Council) and would need Council approval — reflecting the layered institutional process for GST law changes.
- Provision at issue: Section 16(2)(c), CGST Act, 2017
- Constitutional basis of GST Council: Article 279A, inserted by the 101st Amendment Act, 2016
- GST Council voting: 3/4 weighted majority; Centre = 1/3 weight, states collectively = 2/3 weight
- Reform mechanism proposed: ITC eligibility tied to invoice reporting in GSTR-2B and banking-channel payment, not supplier's actual tax deposit
- Constitutional validity of Section 16(2)(c) remains sub judice before the Supreme Court as of 2026