One of the most perplexing situations for GST taxpayers is when an invoice appears in GSTR-2B (indicating that the supplier has reported it), but the supplier has not actually paid the tax to the government. Can the recipient still claim ITC? The answer, following recent Supreme Court rulings, is yes — with important conditions.
The Issue
Under the GST framework, ITC eligibility depends on several conditions, including the supplier furnishing the invoice in GSTR-1/IFF. Historically, tax authorities have often attempted to deny ITC to recipients when suppliers defaulted on tax payment, even if the invoice appeared in GSTR-2B.
The Legal Position
The Statutory Framework
Section 16(2) prescribes the conditions for ITC eligibility. While Section 16(2)(aa) requires that the supplier has furnished the invoice in GSTR-1/IFF and it has been communicated to the recipient, there is no explicit condition requiring that the tax has been paid before the recipient claims ITC.
However, in practice, if the tax is not paid, the ITC becomes ineligible, and the recipient may face consequences.
Supreme Court Ruling in Shanti Kiran India Pvt. Ltd. (2025)
The Supreme Court in Commissioner, Trade & Taxes v. Shanti Kiran India Pvt. Ltd. (2025) delivered a landmark ruling that has significant implications for this issue.
The Court Held:
- If the supplier was registered on the date of transaction, ITC cannot be denied merely because the supplier later defaults in depositing tax or faces cancellation
- Bona fide purchasers cannot be punished for their seller's tax default
Implication: Even if the vendor has not actually paid tax, a bona fide recipient who has fulfilled all conditions within their control should not be denied ITC.
Calcutta High Court (Shyamalmay Paul, December 2025)
The Calcutta High Court held that retrospective cancellation of the supplier's registration, by itself, cannot be a ground to deny ITC to a bona fide purchaser who has fulfilled Section 16 conditions and produced all primary documents.
Allahabad High Court
The Allahabad High Court held that ITC availed by a purchaser could not be denied due to the supplier's default, observing that purchases were undertaken through tax invoices and payments were made through banking channels.
What the Rulings Mean for Taxpayers
For Bona Fide Purchasers
- Protection from supplier defaults — You are not automatically penalized
- But documentation is essential — Maintain invoices, e-way bills, bank payments, and proof of receipt
- Bank transactions strengthen your case — Payments through banking channels are important evidence
- Due diligence is required — Verify that suppliers were registered at the time of transaction
Important Caveats
- This is not a license to deal with fraudulent suppliers — You must still exercise due diligence
- If there is collusion, protection does not apply
- If you had knowledge of fraud, protection does not apply
- ITC must still be claimed within Section 16(4) deadlines
Practical Implications
What This Means for Your ITC Claims
Scenario 1: Supplier Defaults After You Claim ITC
- You are generally protected if you are a bona fide purchaser
- Maintain all documentation to prove your bona fides
Scenario 2: Supplier Defaults Before You Claim ITC
- If the invoice appears in GSTR-2B and you have all documentation, you can claim ITC
- However, the risk of future denial exists
Scenario 3: Supplier Registration Cancelled Retrospectively
- You are protected if you had no knowledge of fraud
- You must demonstrate that you exercised due diligence
How to Protect Your ITC Claims
Supplier Due Diligence:
- Verify supplier GSTIN on the GST portal
- Check the supplier's registration date and status
- Assess the supplier's credibility
Documentation:
- Maintain all tax invoices with proper particulars
- Keep e-way bills for all goods movements
- Maintain delivery challans and proof of receipt
- Keep bank payment proofs (NEFT/RTGS/Cheque)
Bank Transactions:
- Make payments through banking channels
- Avoid cash transactions
- Maintain bank statements
Regular Monitoring:
- Monitor supplier compliance (GSTR-1 filing)
- Check if suppliers are paying tax
- Reconcile ITC claimed with GSTR-2B monthly
Professional Review:
- Have a GST professional review ITC claims periodically
- Seek advice on high-risk transactions
What to Do If ITC Is Denied
Step 1: Gather Documentation — Collect all invoices, e-way bills, bank payment proofs, and proof of receipt.
Step 2: Demonstrate Bona Fides — Show that you exercised due diligence and had no knowledge of default.
Step 3: Cite Supreme Court Rulings — Refer to Shanti Kiran and other relevant rulings.
Step 4: Respond to Notice — File a response within the prescribed time.
Step 5: Seek Professional Help — GST litigation requires expert handling.
Step 6: Consider Appeal — If the order is adverse, appeal to the appropriate forum.
The Supreme Court rulings provide significant protection for bona fide purchasers even when suppliers default on tax payment. However, this protection is not automatic — businesses must maintain proper documentation and exercise due diligence. With the right compliance systems and professional guidance, businesses can protect their ITC claims.
Concerned about ITC claims where the supplier hasn't paid tax? Our team provides expert advisory and representation services to protect your legitimate ITC claims.
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