If your supplier defaults, GST input tax credit is not “automatically” lost, but you can be forced to reverse it in specific situations, and litigation risk is high. The answer differs for (a) non‑payment to supplier within 180 days and (b) supplier not paying tax to Government.

1. Basic legal position under Section 16

• One core condition for availing ITC is that tax charged by the supplier must be actually paid to the Government; if the supplier does not pay, the recipient’s ITC can be denied under section 16(2)(c).​
• Courts and commentary note that this shifts the burden to the buyer to ensure vendor compliance, even where the buyer has already paid the GST amount to the supplier.​

2. Case A – You don’t pay supplier within 180 days

• If you claim ITC on an inward supply (other than RCM) but fail to pay value plus tax to the supplier within 180 days from invoice date, you must reverse proportionate ITC with interest in the GSTR‑3B for the period immediately after 180 days (Rule 37 read with second proviso to section 16(2)).​
• Once you finally pay the supplier (value + tax), you can re‑avail the same ITC in the month of payment; the earlier interest already paid is not refundable.​

3. Case B – You paid supplier, but supplier doesn’t pay GST to Government

• Legally, ITC eligibility still requires that the supplier has discharged the tax to Government; if tax remains unpaid, authorities can demand reversal of ITC with interest and penalty from the recipient, especially where genuineness or due diligence is not established.​
• Policy‑wise, GST Council/CBIC have clarified there should be no “automatic” reversal at buyer’s end; recovery should first be attempted from the defaulting supplier, and only in exceptional cases (missing dealer, bogus firm, closure, no assets) should ITC be recovered from recipient after due notice and hearing.​

4. New Rule 37A – Supplier defaults in filing/ paying in GSTR‑3B

• A specific Rule 37A (and similar updates) provides that where a supplier fails to report/pay the tax for your invoice in GSTR‑3B within the prescribed time, you must reverse the ITC by a stipulated cut‑off (e.g., up to 30 November following the year).​
• If the supplier later pays the tax in GSTR‑3B, you may re‑avail the reversed ITC, but any interest already paid on reversal is generally not refundable.​

5. Practical risk management for recipients

• Put vendor‑onboarding controls: check GST registration, filing pattern, and 2B matching to reduce exposure to supplier default‑based ITC disputes.​
• On receiving notices for ITC reversal due to supplier default, file a detailed reply emphasising genuineness of transaction, payment through banking channels, goods movement, and reliance on CBIC/GST Council statements that primary recovery lies on the supplier except in exceptional cases.

Buyer cannot Be Denied Credit if Supplier Defaults on Tax – Key High Court & Supreme Court Rulings

Buyer’s genuine ITC cannot be denied merely because the supplier defaults in payment of tax or there is mismatch / cancellation, unless collusion, fraud or willful misstatement is shown. All the cited decisions broadly move in this same direction and now stand fortified by the Supreme Court affirming Suncraft Energy (Calcutta HC).​

One of the most contentious issues under GST is whether input tax credit (ITC) of a bona fide buyer can be denied merely because the supplier (or even supplier’s supplier) has defaulted in payment of tax, or its registration has been cancelled. A series of High Court rulings across India, now backed by the Supreme Court, have consistently protected genuine purchasers from mechanical ITC denials and automatic reversals.​

Legal backdrop – Section 16 & the “supplier default” problem

• Section 16(2)(c) requires that tax charged by the supplier is actually paid to the Government, which departments have used to deny ITC solely on supplier non‑payment or 2A mismatches.​
• Courts have repeatedly held that a purchasing dealer who has paid tax to a registered supplier and has evidence of genuine supply, cannot be forced to bear the consequences of the supplier’s independent default, absent fraud, collusion or willful misstatement.​

Supreme Court seal – Suncraft Energy (Calcutta HC affirmed)

1. Suncraft Energy (P.) Ltd. v. Assistant Commissioner, State Tax – Calcutta HC, affirmed by Supreme Court

• In Suncraft Energy, ITC was denied on the ground of GSTR‑2A / 3B mismatch and alleged non‑payment of tax by the selling dealer, without first examining the seller or initiating recovery action against him.​
• Calcutta High Court held that ITC cannot be automatically reversed at the buyer’s end; authorities must first investigate the supplier and attempt recovery from him, and only in exceptional cases and after due examination can the buyer be proceeded against.​

Key High Court decisions – Buyer’s ITC protected

2. Allahabad HC – M/s Safecon Lifescience Pvt. Ltd. v. Additional Commissioner Grade 2 (2025)

• Safecon Lifescience had paid consideration and GST to a registered supplier; department denied ITC citing defaults by the supplier’s suppliers and cancellation of their registrations.​
• Allahabad High Court quashed the demand, holding that when movement of goods, payment through banking channels, and tax invoices are proved, ITC cannot be denied solely because of supplier‑side chain irregularities or unverified intelligence; Section 74 requires clear evidence of fraud or evasion intent, which was absent.​

3. Kerala HC – Mina Bazar Railway Station Road v. State Tax Officer (2023)

• In Mina Bazar, ITC was effectively rejected purely on the basis of difference between GSTR‑2A and 3B, without proper examination of underlying evidence of purchases.​
• Kerala High Court held that ITC cannot be denied solely on 2A/3B mismatch; the matter was remitted to re‑examine books, invoices and other proof, relying also on the Supreme Court ruling in Ecom Gill Coffee and the Calcutta HC judgment in Suncraft.​

4. D.Y. Beathel Enterprises v. State Tax Officer – Madras HC (2021)

• Madras High Court in D.Y. Beathel quashed ITC reversal orders where department straightaway targeted the buyer without proceeding against the selling dealers, even though those dealers had collected tax.​
• The Court ruled that when sellers have admittedly collected tax, primary recovery has to be from them; only upon failure, and after establishing complicity, can the buyer be fastened with liability.​

5. Gargo Traders, Vishal Kumar Arya, Sanchita Kundu & other Calcutta HC cases

• In Gargo Traders, LGW Industries, Vishal Kumar Arya and similar matters, Calcutta High Court reiterated that a bona fide purchaser cannot be denied ITC merely because the selling dealer’s registration was retrospectively cancelled or tax was not deposited.​
• The consistent thread is that denial of ITC without examining the seller, without initiating recovery against him, and without demonstrating collusion with the buyer, is arbitrary and unsustainable.​

6. Other supportive High Court rulings

• High Courts of Andhra Pradesh, Orissa, Punjab & Haryana and others (e.g., Arhaan Ferrous, Bright Star Plastic Industries, Gheru Lal Bal Chand) have also emphasised that ITC of a genuine buyer should not be disallowed merely for seller’s default in depositing tax, once the buyer proves identity of supplier, receipt of goods and payment of consideration plus GST.​
• Earlier VAT‑era jurisprudence (like Gheru Lal Bal Chand) has been relied upon to support the principle that the purchasing dealer is not required to endlessly police the seller’s internal compliance, beyond reasonable due diligence.​

Common principles emerging from the judgments

Across these decisions, some clear principles have crystallised:

• No automatic reversal at buyer’s end: ITC cannot be mechanically reversed merely due to supplier’s tax default, 2A mismatch, or cancellation of registration, without detailed enquiry and action against the supplier.​
• Burden on department to establish fraud / collusion: Where the buyer produces tax invoices, e‑way bills, bank statements and proof of receipt of goods/services, ITC cannot be denied unless the department brings cogent evidence of fake transactions or collusion.​
• First recover from the defaulter: Courts have repeatedly reminded officers that primary recovery must be initiated against the defaulting selling dealer who collected tax, and only in exceptional cases, after recording reasons, can proceedings be shifted to the purchaser.​
• Press releases and GST Council intent: Calcutta HC in Suncraft also relied on CBIC/GST Council press releases clarifying that ITC should not be automatically denied to buyers for supplier non‑payment, reflecting legislative intent against penalising bona fide recipients.​

Practical takeaways for taxpayers

For drafting replies to notices / orders denying ITC due to supplier default, these rulings offer strong support:

• Collect and file:
  • GST registration details of the supplier,
  • Tax invoices, e‑way bills, LR/transport documents,
  • Proof of receipt of goods/services,
  • Bank statements evidencing payment of value + GST.​
• Specifically cite Suncraft Energy (Calcutta HC + Supreme Court affirmation) and Safecon Lifescience (Allahabad HC) to argue that there can be no automatic ITC reversal from buyer without action against the supplier and without proof of fraud or collusion.​
• Rely on Mina Bazar and other High Court decisions to challenge assessments made purely on the basis of GSTR‑2A/3B mismatch without proper appreciation of primary evidence.​

When courts have upheld or permitted denial of ITC

1. Sham or accommodation entries and fake invoicing

• In multiple cases across GST/VAT regimes, High Courts have accepted denial of ITC where the so‑called suppliers were non‑existent entities, addresses were bogus, or there was no proof of actual movement of goods despite voluminous “paper” invoices.​
• In such fact patterns, courts treat the buyer as part of or willfully blind to the racket; Section 16 and anti‑evasion provisions are then interpreted strictly, allowing reversal of ITC with interest and penalty.​

2. Lack of basic evidence and due diligence by buyer

• Some judgments note that where the buyer fails to produce primary evidence – such as transport documents, stock records, payment trails or even correct supplier details – the presumption of genuine trade falls, and ITC can be refused.​
• Courts have emphasised that the protection for bona fide buyers is not for those who make purchases only on paper, or who never bothered to verify if the supplier even existed or was capable of effecting supplies.​

3. Divergent / stricter views from certain High Courts

• Analyses of recent case law point out that some High Courts (e.g., under earlier VAT laws and in certain GST matters) have taken a stricter line: they stress statutory conditions like tax payment and return reflection and allow ITC denial where these are clearly not satisfied and genuineness is doubtful.​
• Commentators therefore caution that, until the Supreme Court settles the issue in a comprehensive GST ruling, denial of ITC in weak‑fact cases remains a real risk, especially where buyers cannot substantiate receipt of goods or their own diligence.​

Supreme Court signals – protection, but with limits

• Supreme Court‑linked decisions (e.g., affirming Suncraft‑type reasoning and protecting bona fide dealers under DVAT) underline that a buyer who has fulfilled all statutory obligations should not be punished for supplier’s independent default.​
• At the same time, these judgments consistently reserve the right of the department to deny ITC where there is strong evidence of collusion, fraud, non‑existent supplies or failure to meet statutory conditions; they do not convert ITC into an absolute, no‑questions‑asked entitlement.​

Practical implications – when buyers are vulnerable

• Buyers remain vulnerable where:
  • The supplier is fictitious or untraceable and buyer has no logistics/stock evidence,
  • Payments are in cash / layered,
  • There is a web of circular trading with no real consumption, or
  • Notices highlight specific adverse material which the buyer cannot rebut.​
• In such cases, authorities can lawfully deny ITC and courts are unlikely to intervene, making it essential for businesses to maintain robust vendor‑due‑diligence files, movement proofs and documented compliance reviews to show they are not beneficiaries of supplier fraud.

CONCLUSION

Overall, the emerging jurisprudence draws a clear but balanced line: a bona fide buyer who proves genuine supply, valid documentation and payment of consideration plus GST cannot be denied ITC merely because the supplier defaults on tax payment or return filing; however, ITC remains a conditional concession that can be legitimately refused or reversed where transactions are sham, suppliers are fictitious, statutory conditions under section 16 are clearly not met, or therCan I claim GST ITC if my supplier has defaulted, using tax management services?e is evidence of collusion, circular trading or gross lack of due diligence, in which case the tax burden can lawfully shift back to the recipient

CA Ankit Gulgulia (Jain)

FCA, CWM (AAFM-US), CBV, CIFRS, R-ID, B.COM (H), RV* (IBBI)

Practising Chartered Accountant in Delhi NCR Since 2011. He can be contacted at ankitgulgulia@gmail.com or +91-9811653975.