Gujarat HC ruling on ITC denial raises compliance burden for businesses
May 5, 2026
Gujarat High Court upholds ITC denial for supplier defaults, increasing compliance costs and working capital pressure for businesses across multi-layered supply chains
The Gujarat High Court’s ruling upholding the denial of input tax credit (ITC) to buyers when suppliers fail to deposit Goods and Services Tax (GST) is set to increase compliance costs and working capital pressure, especially for businesses with multi-layered supply chains, according to tax experts.
In a judgment dated May 1 in Maruti Enterprise vs Union of India and connected petitions, a division bench of Justices A S Supehia and Pranav Trivedi upheld the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax (CGST) Act. Section 16(2) of the CGST Act sets the mandatory conditions a buyer must satisfy to claim ITC, namely having a valid invoice, receiving goods/services, ensuring the supplier has paid tax, and filing returns. The court ruled that ITC is a statutory entitlement subject to conditions, not a vested right.
It rejected arguments that denying credit to bona fide buyers for supplier defaults was arbitrary and declined to restrict the provision's application. For industry, the ruling highlights a major risk: Even compliant buyers may have to reverse ITC along with interest if their suppliers default on tax payments.
“This judgment reinforces a compliance-driven interpretation of ITC under GST, confirming that ITC entitlement is inseparably linked to actual tax payment by suppliers. Suppliers' defaults therefore remain a continuing risk even for bona fide recipients,” said Harpreet Singh, Partner, Deloitte.
A Finance Ministry official, explaining the government’s position on compliance, said, “Earlier there was no defined timeline, which effectively required buyers to monitor suppliers every month. Now, under Rule 37A, the recipient needs to check only once a year — whether the supplier has paid the tax and filed GSTR-3B by September 30 following the end of the financial year. The buyer is then given two additional months until November 30 to reverse the ITC if required. It is a clear relaxation.” He added that while the government has put this facilitative mechanism in place, the onus also lies on the recipient to exercise due diligence in selecting suppliers and monitoring their compliance track record. Meanwhile, the official also added that the government is working on further reforms to plug such defaulting suppliers.
An email sent to the Finance Ministry remained unanswered until this news was published.
Tax experts expect tighter vendor selection, enhanced due diligence, and stronger contractual safeguards across sectors such as manufacturing, logistics, textiles, and engineering. Companies may increasingly insist on indemnity clauses, bank guarantees, or other protections in procurement contracts. “The recipient retains the contractual right to recover the tax component and damages from the defaulting supplier. This underscores the need for watertight supply chain contracts with robust indemnity and compliance safeguards,” said Abhishek A Rastogi, Founder, Rastogi Chambers, who is arguing similar petitions in various high courts.
However, Vivek Jalan, Partner with Tax Connect Advisory, submitted that the recipient should not be held responsible for the supplier’s default as it is impossible for the recipient to control the supplier even after taking adequate precautions on the KYC front. “Since the government granted GST registration to the supplier and it was not suspended or cancelled at the time of supply, the government may recover the tax from the supplier. It has authority over the supplier and the enforcement machinery, and hence it should act against the supplier; the recipient should not be penalised for a supplier’s default. Shifting the burden onto a bona fide recipient undermines trust in the framework and discourages genuine compliance efforts,” he argued.
Rastogi also flagged a broader concern: Bona fide purchasers have no control over supplier compliance yet bear a disproportionate burden through ITC reversals. The court addressed “double taxation” concerns by clarifying that ITC arises only when tax is actually paid to the government. It noted that the GST framework allows reversal and subsequent re-availment of the credit once the supplier pays the tax, besides enabling recovery proceedings against defaulters.
The bench distinguished the GST regime from earlier VAT judgments (such as those by the Delhi High Court), noting that allowing ITC without actual tax payment could disrupt revenue sharing between states and undermine the integrity of the tax system.
[The Business Standard]
