The Hon’ble Supreme Court of India, in Bhandari Scrap Traders v. Union of India & Ors. [SLP (C) No. 23931 of 2026, dated July 24, 2026], has finally put to rest the intense constitutional debate surrounding Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”). Dismissing the Special Leave Petitions (SLPs) and affirming the landmark judgment of the Hon’ble Gujarat High Court in Maruti Enterprise v. Union of India & Ors., the Apex Court held that Section 16(2)(c) is constitutionally valid and cannot be read down.
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Consequently, Input Tax Credit (ITC) is not a vested right but a statutory concession, and it cannot be availed by a recipient unless the tax charged on the supply has actually been deposited by the supplier into the government exchequer. The ruling firmly distinguishes the GST framework from erstwhile Value Added Tax (VAT) regimes, establishing that the statutory mechanism of Section 41(2) read with Rule 37A of the CGST Rules, 2017, provides a complete code for credit reversal and re-availment, thereby precluding the application of the doctrine of impossibility (lex non cogit ad impossibilia).
1. Introduction & Context
The eligibility and entitlement to Input Tax Credit (ITC) have been the most litigated aspects of the GST regime. Taxpayers have consistently challenged the constitutional validity of Section 16(2)(c) of the CGST Act across various High Courts, which conditions the recipient’s ITC on the supplier’s actual deposit of tax.
The primary grievance of bona fide buyers has been that they are penalized for the compliance failures of their suppliers—a factor entirely outside their control. However, with the Supreme Court’s ruling in Bhandari Scrap Traders, the judicial pendulum has firmly swung in favor of strict statutory compliance, reinforcing the Revenue’s powers to safeguard the fiscal architecture of the destination-based consumption tax. This dismissal of SLP and affirming the judgment of the Gujarat HC now firmly establishes that ITC is conditional upon the supplier paying tax to the Government. This is a mandatory condition which cannot be declared invalid or even read down.
2. The Statutory Architecture: Why GST is Different from VAT
The petitioners heavily relied on historical VAT-era jurisprudence, specifically the Delhi High Court’s ruling in On Quest Merchandising India (P) Ltd. v. Government of NCT of Delhi, which was affirmed by the Supreme Court in Commissioner of Trade & Tax Delhi v. Arise India Ltd. Under the Delhi VAT Act, Section 9(2)(g) was read down to protect bona fide purchasing dealers from being denied credit due to the default of selling dealers. We have seen that the honorable SC dismissed the SLP of revenue in Shanti Kiran’s case as well which pertained to section 9(2)g) of Delhi VAT Act but now after this judgment drawing parity between the two enactments has been denied.
This means that the precedents in Arise India, Quest Merchandising and Shanti Kiran are no longer applicable in GST regime so far as drawing parity between similarity of provisions of Delhi VAT Act and GST is concerned.
The Supreme Court in Bhandari Scrap Traders accepted the Gujarat High Court’s detailed analysis, which distinguished the CGST Act from the Delhi VAT Act based on the following statutory provisions:
● Section 41(2) of the CGST Act (Self-Correction Mechanism): Unlike VAT regimes, Section 41(2) (as substituted by the Finance Act, 2022) explicitly mandates that if a supplier fails to deposit the tax, the recipient must reverse the ITC along with interest. Crucially, the proviso allows the recipient to re-avail the credit once the supplier subsequently discharges the tax liability.
● Rule 37A of the CGST Rules, 2017: This rule prescribes the exact mechanism for such reversal and re-availment, ensuring the recipient is not left permanently remediless.
● Section 53 of the CGST Act (Inter-State Fund Transfers): GST is a destination-based consumption tax. If the tax is not actually paid by the supplier, the central government cannot transfer the corresponding funds to the destination state, which would collapse the federal fiscal structure.
● Section 155 of the CGST Act (Burden of Proof): The burden of proving a valid claim to ITC is explicitly cast upon the person claiming it.
3. The Divergent Judicial Landscape
The jurisprudence on Section 16(2)(c) has been highly polarized across various High Courts. The table below outlines the key judicial alignments leading up to the Supreme Court’s definitive ruling:
Note on Prime Metals v. CBIC [SLP (C) No. 18577 of 2026]: Although widely discussed, the Supreme Court in Prime Metals did not decide on the merits of Section 16(2)(c). It merely declined to interfere with the Rajasthan High Court’s dismissal because an alternative statutory remedy was available, leaving the constitutional question open. The decision in Bhandari Scrap Traders* is the first direct affirmation on merits.
4. Key Takeaways from the Supreme Court’s Ruling
● No Parity with VAT: The Supreme Court explicitly held that no parity can be drawn between the CGST Act and the Delhi VAT Act. The detailed machinery under the GST law (including Sections 41, 73, and 74) makes it a distinct, self-contained code.
● Tripura HC View Diluted: The pro-taxpayer ruling of the Tripura High Court in Sahil Enterprises (which read down Section 16(2)(c) to apply only to non-bona fide or collusive transactions) stands significantly diluted and practically overruled in principle by this Supreme Court affirmation of the Gujarat High Court’s view.
● Recovery from Suppliers: The Gujarat High Court (affirmed by the SC) observed that the recipient is not remediless, as the Revenue is empowered to recover the unpaid tax from defaulting suppliers under Sections 73 and 74, which ultimately enables the recipient to re-avail the credit.
● Call for Technological Reforms: Interestingly, the High Court highlighted the urgent need for the Government to introduce a robust, technology-driven, real-time mechanism allowing buyers to verify invoice-wise tax payments by suppliers instantaneously.
5. Strategic Action Points for Corporate Tax Leaders
With the constitutional validity of Section 16(2)(c) now firmly established, businesses must shift from litigation-ready postures to robust compliance-driven risk mitigation.
A. Enhanced Vendor Due Diligence (VDD)
● Implement a rigorous vendor onboarding process, evaluating the GST compliance rating and historical filing patterns of suppliers.
● Categorize vendors into risk buckets (Low, Medium, High) based on their GSTR-1 and GSTR-3B filing consistency.
B. Contractual Safeguards & Indemnities
● Incorporate strict “Tax Indemnity Clauses” in purchase agreements, holding the supplier liable for any interest, penalty, or lost ITC resulting from their non-compliance.
● Adopt “Pay-when-Paid” or “Holdback” payment terms, where the tax component of the invoice is released to the supplier only after the transaction reflects in the recipient’s Form GSTR-2B and the supplier files their Form GSTR-3B.
C. Automated Reconciliation & Real-Time Monitoring
● Deploy automated GST reconciliation tools to perform continuous, real-time matches between purchase registers and Form GSTR-2B.
● Establish an automated communication workflow to immediately alert defaulting vendors regarding mismatches.
D. Compliance with Rule 37A
● Actively track unpaid supplier invoices and ensure timely reversal of ITC under Rule 37A to avoid compounding interest liabilities, followed by swift re-availment once the supplier complies.
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