- Apex Court backs constitutional validity of Section 16(2)(c) of CGST Act in Bhandari Scrap Traders case
- Businesses face heightened ITC risk despite invoice matching, GSTR-2B verification and compliant documentation
- Tax experts warn that litigation may now shift to bona fide purchasers, supplier defaults and retrospective cancellations
NE LAW & BUSINESS BUREAU
AHMEDABAD, AUG 24
A promise that once stood at the heart of the Goods and Services Tax (GST) regime — seamless Input Tax Credit (ITC) — is entering a far more demanding phase for businesses after the Supreme Court declined to entertain the taxpayer’s challenge in Bhandari Scrap Traders, effectively leaving intact the Gujarat High Court’s ruling upholding the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax (CGST) Act.
The ruling has potentially significant implications for businesses that have diligently matched invoices, checked supplier registrations, maintained documentation and relied upon GSTR-2B, because compliance within the recipient’s control may no longer by itself provide sufficient protection for ITC.
Ruturaj Bhide, Associate Partner, Dhruva Advisors India Pvt. Ltd., described the development as a significant test for one of GST’s defining promises.
“ITC was one of the defining promises of the GST regime but, nearly a decade later, that promise after a long journey of compliance, litigation and evolution is being tested,” Bhide said.
He noted that most businesses had adapted to the GST compliance ecosystem and that prudent taxpayers had established robust processes around invoice matching through GSTR-2B, verification of registrations, documentation and disciplined compliance.
“Most businesses have adapted and today, prudent taxpayers have built robust processes around invoice matching through GSTR-2B, verification of registrations, documentation and disciplined compliance; and are claiming ITC only after complying conditions that are within the recipient’s control. But is that enough? Perhaps not,” he said.
Tax payment by supplier becomes critical ITC hurdle
The Supreme Court’s refusal to grant leave to appeal has left standing the Gujarat High Court’s position on Section 16(2)(c), under which the recipient’s entitlement to ITC is linked to the supplier having actually paid the corresponding tax to the Government.
According to Bhide, the ruling is significant because the Apex Court did not adopt the narrower approach taken by the Tripura High Court in Sahil Enterprises, where the provision had been read down.
“By affirming the constitutional validity of Section 16(2)(c) of the CGST Act, the Court has upheld — and not read down as was done in the case of Sahil Enterprises by the Tripura High Court — the condition that the supplier must have actually paid the tax to the Government before the recipient can ultimately enjoy the credit,” he said.
From the Revenue’s perspective, the rationale may appear straightforward: the Government cannot be expected to grant credit where the corresponding tax has not reached the exchequer.
But the ruling creates a practical dilemma for bona fide purchasers, who ordinarily have no direct visibility into whether a supplier has actually discharged tax on an individual transaction.
“The difficulty lies elsewhere. A genuine purchaser has no visibility as to whether a supplier/vendor has actually discharged tax on a particular invoice. The GST portal enables recipients to verify whether an invoice has been reported in GSTR-1 and reflected in GSTR-2B, but it does not indicate whether the supplier has ultimately and actually paid the tax on the said invoice,” Bhide pointed out.
Bona fide buyers, supplier defaults could fuel next litigation wave
The decision, while settling the constitutional challenge for the present, may not mark the end of the ITC controversy.
Bhide said several important practical and legal questions remain open, particularly concerning the consequences for genuine purchasers when suppliers default.
“While the Supreme Court endorsed the position that tax should reach the exchequer to enable ITC to the recipient, the judgment is unlikely to be the final chapter in this debate,” he said.
Among the questions likely to shape future litigation are whether a bona fide recipient should suffer for a supplier’s default, whether the supplier rather than the recipient should be the first target of recovery proceedings, and whether procedural safeguards can be built into the manner in which such disputes are handled.
The treatment of retrospective cancellation of GST registrations could also emerge as a major area of contention, particularly where transactions were undertaken when the supplier’s registration was valid and the invoices were duly reported.
“Several aspects of the matter are unaddressed — should the recipient suffer in case of supplier default and the consequences for bona fide purchasers, should the first port of call be the supplier rather than the recipient and, in that way, a procedural safeguard is built into the handling of such matters, what happens in case of retrospective cancellations,” Bhide said.
He expects litigation to increasingly focus not merely on the validity of the statutory provision, but on how the provision is administered and applied by tax authorities.
“Litigation on this topic is therefore likely to focus on the manner in which the provisions are administered and applied. One thing is certain, the litigation surrounding this issue has undoubtedly become much tougher for the taxpayer!” he said.
For businesses, the immediate message is one of heightened vigilance. Maintaining invoices, ensuring that suppliers are properly registered and monitoring GSTR-1 and GSTR-2B may need to be supplemented by stronger vendor due diligence and contractual safeguards.
“For businesses, however, one immediate takeaway is clear — the threshold for safeguarding ITC has become significantly higher. Completing every compliance requirement within one’s own control may no longer be sufficient,” Bhide cautioned.
The development could therefore push GST compliance into a new phase in which vendor risk management becomes as important as the recipient’s own return-filing discipline, potentially compelling businesses to revisit supplier onboarding, tax-risk clauses, indemnities, reconciliation systems and periodic vendor monitoring.
