You paid the GST. Your supplier didn’t. Now what?

Imagine this.

ABC Ltd. purchases goods worth ₹10 lakh from a GST-registered supplier. The supplier charges GST of ₹1.80 lakh. ABC Ltd. pays the entire ₹11.80 lakh, receives the goods, has a valid tax invoice and claims ₹1.80 lakh as Input Tax Credit (ITC).

Everything looks perfectly fine.

A few months later, ABC Ltd. discovers that the supplier has not paid the corresponding GST to the Government.

The immediate question is:

“I paid the supplier in full. I received the goods. I have the invoice. So why should my ITC be affected?”

That question has now reached the Supreme Court.

Where does the problem arise?

Section 16(2)(c) of the CGST Act, 2017 makes actual payment of the tax charged on the supply to the Government one of the conditions for availing ITC.

So there are two different steps:

Buyer pays the supplier → Supplier pays the tax to the Government.

The buyer can control the first step.

The second depends on the supplier.

And that is what makes this issue difficult for a genuine purchaser.

The courts took different views

In Sahil Enterprises v. Union of India & Ors., decided by the Tripura High Court on 6 January 2026, the Court upheld the constitutional validity of Section 16(2)(c), but read down its application. It held that ITC should not be denied to a bona fide purchaser in a genuine transaction merely because the supplier failed to deposit the tax, distinguishing such cases from collusive or fraudulent transactions.

The Gujarat High Court subsequently took a different approach in Maruti Enterprise v. Union of India & Ors., upholding Section 16(2)(c) without creating a general exception for bona fide purchasers.

The issue then reached the Supreme Court.

What did the Supreme Court say?

On 24 July 2026, the Supreme Court decided Bhandari Scrap Traders v. Union of India & Ors., SLP(C) No. 23931 of 2026 and connected matters.

The Supreme Court dismissed the petitions and upheld the Gujarat High Court’s decision. It found no ground to declare Section 16(2)(c) unconstitutional or to read it down in the manner sought by the purchasers.

The Supreme Court also considered the reasoning adopted by the Tripura High Court and preferred the approach taken by the Gujarat High Court.

The message is clear:

Paying your supplier does not, by itself, remove the requirement that the tax must actually be paid to the Government.

The underlying principle is simple: ITC is a statutory benefit, and its availment is subject to the conditions prescribed under the GST law.

In other words, for ITC, it is not enough to ask:

“Did I pay my supplier?”

You also have to consider:

“Was the tax actually paid to the Government?”

Does that mean the ITC is gone forever?

Not necessarily.

This is where the practical side becomes important.

The Supreme Court referred to the mechanism under Section 41 and the relevant recovery provisions, under which reversed ITC can be re-availed after the supplier discharges the tax liability, subject to the applicable conditions.

There is also a specific mechanism under Rule 37A of the CGST Rules for certain supplier-default situations. Where the supplier has reported the invoice details but has not furnished the corresponding GSTR-3B within the prescribed timeline, the recipient is required to reverse the relevant ITC within the prescribed time. If the supplier subsequently furnishes the return, the recipient can re-avail the reversed credit in accordance with the Rule.

So the issue may not always be a permanent loss of ITC.It can instead become a question of timing, compliance and cash flow.

ABC Ltd. may have to reverse ₹1.80 lakh today and wait until the statutory conditions for re-availment are satisfied.

That means the real question for a business may be:

“For how long will my ITC remain unavailable, and what will that cost me?”

Your supplier can become your ITC risk

This is the bigger business lesson.

A company may have hundreds of suppliers. Most may comply properly, while a small number may repeatedly create GST-related issues.

Those suppliers deserve closer attention.

Businesses can:

• strengthen GST checks during vendor onboarding;

• regularly reconcile purchase records with GST data;

• identify suppliers with recurring compliance issues;

• follow up and maintain records of the action taken; and

• ensure procurement, finance and tax teams communicate with each other.

The objective is not to guarantee that every supplier will comply.

It is to identify supplier-related ITC risk before it becomes a bigger problem.

The bigger lesson

GST compliance is not only about asking:

“Are we compliant?”

For businesses claiming substantial ITC, another question is becoming equally important:

“Are our suppliers compliant?”

You may have a genuine transaction.

You may have received the goods.

You may have paid the supplier in full.

You may have a valid tax invoice.

But if the supplier fails to discharge the tax, Section 16(2)(c) can still affect your ITC.

The Supreme Court has now made the legal position clear: there is no general exemption for a bona fide purchaser merely because the purchaser has paid the supplier.

For businesses, therefore, the better approach is not to wait until an ITC dispute arises.It is to identify, monitor and manage supplier-related ITC risk as part of the overall GST compliance process.

The Takeaway

So, coming back to our original question:

You paid GST to your supplier. Can you still lose your ITC?

Yes, the supplier’s failure to pay the tax can affect your ITC.

But that does not necessarily mean the credit is permanently lost. The GST framework provides mechanisms for reversal and subsequent re-availment when the statutory conditions are satisfied.

The practical lesson for businesses is simple:

Your GST compliance does not end with your own books. Your supplier’s compliance can also affect your ITC.

Because you may have paid the supplier in full.

Yet your supplier’s GST default can still become your ITC problem.

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