Your input tax credit depends on your supplier paying the tax: Bhandari Scrap Traders

What the dispute was about

Section 16(2)(c) of the CGST Act allows a buyer to take input tax credit only if the tax charged on the purchase has actually been paid to the government. Buyers who had paid their suppliers in full, but whose suppliers never deposited the tax, were having their credit denied.

A batch of traders, including Maruti Enterprise and Bhandari Scrap Traders, went to the Gujarat High Court. They asked that the clause be declared unconstitutional, or at least read down so that an honest buyer is not punished for a supplier's default.

How the case travelled

On 1 May 2026 the Gujarat High Court ruled against the traders. It held that the clause is not unconstitutional and cannot be read down, and it treated GST as materially different from the older VAT law. It read the clause together with section 41(2), section 155 and rule 37A, which deal with reversing and later re-availing credit. Reports also say it suggested a real-time verification mechanism.

The High Courts were not in agreement. Reports on the Tripura High Court's Sahil Enterprises decision describe it as reading the clause down to protect a genuine buyer. That conflict is why the matter reached the Supreme Court.

What the Supreme Court said

A bench of Justices Sanjay Kumar and Sanjeev Sachdeva dismissed the petitions. It agreed with the Gujarat High Court that there were no grounds to declare section 16(2)(c) unconstitutional or to read it down.

The Gujarat reasoning that the Court accepted also covers what happens next. A buyer whose credit has been reversed can claim it again once the supplier pays the outstanding tax.

What the order does not decide

Commentators point out that this order does not mean every credit mismatch is fraud. It also does not remove the department's duty to establish the facts before it reverses a buyer's credit.