The Supreme Court has settled one of the most consequential and long-running constitutional challenges in Indian GST jurisprudence, upholding the validity of Section 16(2)(c) of the CGST Act — the provision that makes a buyer's entitlement to Input Tax Credit conditional on the supplier having actually deposited the corresponding tax with the government. A batch of petitions challenging the provision, following an earlier Gujarat High Court ruling in the government's favour, was dismissed.
The practical effect of the provision, now judicially confirmed, is that a purchasing business can end up denied ITC — and consequently facing a real cash cost — purely because a supplier further up the chain defaulted on remitting tax, even where the buyer paid the supplier in full, including the GST component, and has a valid invoice in hand. Businesses have long argued this shifts an enforcement burden onto buyers that properly belongs with tax authorities chasing non-compliant sellers; the Court's ruling confirms that argument does not defeat the provision's constitutional validity.
The challenge to Section 16(2)(c) had been building for years across multiple High Courts, with businesses and trade bodies arguing the provision effectively penalises a compliant taxpayer for a third party's default — a result they contended was disproportionate and arbitrary, and therefore vulnerable to constitutional challenge under Article 14. The government's consistent defence has been that the ITC mechanism is fundamentally designed around actual tax having entered the government exchequer at each stage of the supply chain, and that permitting credit without that underlying payment would create a structural revenue leakage the entire GST framework's input-credit chain is specifically designed to prevent. With the Supreme Court now having sided decisively with the latter position, the constitutional question appears settled for the foreseeable future, barring a larger bench revisiting it.
With the constitutional question now closed at the Supreme Court, the practical priority for businesses shifts decisively to supplier due diligence and ongoing GST compliance monitoring. Periodic reconciliation of GSTR-2B against actual purchases, vendor GST compliance ratings, and contractual indemnity clauses requiring suppliers to warrant their own tax compliance are no longer optional best practices — they are now the primary line of defence against ITC denial for a default that is entirely outside the buyer's control. Businesses should also consider building supplier GST-compliance checks into their vendor onboarding process itself, rather than treating it purely as an ongoing monitoring exercise after the relationship is already established.