GST Law Panel: Buyer ITC Safe Even if Supplier Defaults

What Happened on 11 July 2026?

The GST Council's law committee gave a green light on Friday to a proposal that could change how ITC disputes work in India. For years, businesses have faced a brutal situation: pay full invoice amount including GST to your supplier, and still lose your input tax credit if that supplier doesn't deposit the tax.

That proposal has now cleared both the fitment committee and the law committee. The next stop is the full GST Council meeting, likely a few weeks away. Once approved there, the amendment to Section 16(2)(c) of the CGST Act will be introduced.

This is not the first time courts have weighed in on this issue. The Madras HC ITC ruling 2026 and several other High Court judgments have taken varying positions on whether buyers deserve protection. The new law aims to settle this debate permanently.

The Core Problem: Why Was ITC Being Denied?

Section 16(2)(c) of CGST Act – The Clause That Hurt Buyers

Under Section 16(2)(c) of the CGST Act, a buyer can claim input tax credit only after the supplier actually deposits the GST with the government. On paper this sounds reasonable. In practice, it put buyers in an impossible position.

You raise a purchase order. Supplier sends invoice with 18% GST. You pay the full amount including GST through your bank account. The supplier files GSTR-1, so the invoice shows in your GSTR-2B. Everything looks clean. But then the supplier doesn't file GSTR-3B and doesn't deposit the tax.

Months later, a GST notice lands at your door. Reverse the ITC. Pay interest. Possibly face penalties. This is the classic denial of ITC when the supplier has not paid the GST – and bona fide recipients have suffered this for years.

If you've received such a notice, read our guide on how to reply to a GST notice before responding to the department.

How the New Rule Will Protect You

Under the proposed change, your ITC will be safe if you meet two clear conditions:

If both conditions are met, the tax department will pursue recovery from the defaulting supplier. Your credit stays intact. This is a direct amendment to the logic of Section 16(2)(c) of the CGST Act.

Before this change, even buyers who claimed ITC on all genuine purchases were at risk. The new rule finally draws a clear line between a bona fide buyer and a participant in fraud.

Current Law vs What Changes After Amendment

What If Your Supplier Hasn't Filed GSTR-1?

This is a related but different problem. If your supplier hasn't filed GSTR-1, the invoice won't appear in your GSTR-2B at all. Under the new rule, GSTR-2B reflection is one of the two required conditions. So even after this amendment, if your supplier is not filing GSTR-1, your ITC remains at risk.

The practical fix: check GSTR-3B ITC reconciliation every month before claiming credit. If an invoice is missing from GSTR-2B, follow up with your supplier before the filing deadline. Don't claim ITC on invoices that aren't showing.

GSTR-3B Not Filed by Supplier – Case Law Position

Courts across India have given inconsistent rulings when a supplier has not filed GSTR-3B or has not deposited tax. Some High Courts have protected buyers who had proof of payment and GSTR-1 reflection. Others have backed the department's demand for ITC reversal.

The Madras High Court in particular has gone back and forth on this. The Gujarat HC and Delhi HC have also heard cases where buyers challenged ITC reversals caused purely by supplier defaults.

This legal inconsistency is exactly why the industry pushed for a statutory fix rather than relying on court-by-court outcomes. The new amendment, once passed, will override the conflicting case law and establish a single clear standard.

Fake Invoices: Why the Govt Added This Caveat

The reason Section 16(2)(c) existed in the first place was fake ITC fraud. Thousands of shell companies were created to generate bogus invoices. Businesses claimed ITC on purchases that never happened. The government lost thousands of crores.

If you want to understand how fake ITC fraud works and what red flags to watch for, read our detailed guide: Fake ITC Fraud – GST Warning Signs. Knowing the warning signs protects you from unknowingly becoming part of a fraud chain.

The new amendment is carefully worded to protect only genuine buyers. The two conditions – GSTR-2B reflection and banking channel payment – are designed to exclude cases where no real transaction happened.

What Happens If a Vendor Does Not Pay GST – Step-by-Step for Buyers

How to Calculate Your ITC Exposure Right Now

Before the amendment passes, your current ITC exposure from supplier defaults is real. Here's how to check it:

First, pull your ITC calculation worksheet from GSTR-3B for the last 12 months. Compare it against your GSTR-2B month by month. Any invoice you claimed that doesn't appear in GSTR-2B is a potential demand.

Second, check whether payments were made through banking channels. If you paid any supplier in cash and they later defaulted, that ITC claim is weak even under the new proposed rule.

Third, for any mismatch found, contact your supplier and get GSTR-1 corrected if possible. If the supplier is unresponsive or cancelled, document that clearly for your records.

What Is NGTP in GST?

Timeline: When Will This Become Law?

Until the GST Council formally approves this and the CGST Act is amended, the current position under Section 16(2)(c) still applies. Don't assume your existing ITC disputes are automatically resolved. If you have a pending ITC notice, handle it under current law.

You can track open GST notices and demands through the GST Notices section on our site.

FAQ:

Q1: What is denial of ITC when supplier has not paid GST?
Tax dept reverses buyer's ITC if supplier didn't deposit GST, even if buyer paid full invoice.

Q2: Can I get ITC if supplier doesn't file GSTR-1?
Risky – invoice won't appear in GSTR-2B. New rule still needs GSTR-2B reflection as condition.

Q3: What is Section 16(2)(c) of CGST Act amendment?
It required supplier to deposit GST before buyer could claim ITC. Amendment will shift burden to supplier.

Q4: What happens if a vendor does not pay GST?
Currently buyer loses ITC. After amendment, govt will chase supplier instead of buyer.

Q5: GSTR-3B not filed by supplier – what happens to my ITC?
ITC stays at risk unless invoice is in GSTR-2B. Courts have given mixed rulings so far.

Q6: What is NGTP in GST?
Non-GST Taxable Person. Businesses dealing in non-GST goods/services. Separate from ITC rules.

Q7: What is GSTR-2B?
System-generated ITC statement. Shows invoices suppliers filed in GSTR-1. Main proof for ITC.

Q8: Who is a bona fide recipient in GST?
Buyer who paid full invoice via banking channel and can show invoice in GSTR-2B.

Q9: When will this rule be effective?
After GST Council approves it. Both fitment and law committees already cleared it (July 2026).

Q10: What proof is needed for ITC protection?
Invoice in GSTR-2B + payment through banking channel (NEFT/RTGS/cheque).

Q11: Will fake invoice users benefit?
No. Rule is only for genuine buyers with real transactions and real bank payments.

Q12: What does law committee clearance mean?
Proposal moves to full GST Council for final approval. Not yet law.

 

Author: Hemant Mali, SEO Intern, GSTRegistration.co. Covers GST updates, compliance news, and tax advisory for Indian businesses.