In a significant relief for businesses, the GST Council’s Law Committee has approved a proposal to safeguard the input tax credit (ITC) of bona fide purchasers even if their suppliers fail to deposit the collected GST with the government. The proposal, which has also been cleared by the Fitment Committee, is expected to be placed before the GST Council for final approval at its next meeting.

If approved by the Council, the proposal would mark a major policy shift under the Goods and Services Tax (GST) regime by ensuring that genuine buyers are not denied ITC merely because of a supplier’s tax default, provided certain conditions are satisfied.

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Conditions for ITC Protection

Under the proposed framework, a purchaser’s ITC would remain protected if:

• The supplier has reported the invoice in its GST returns, resulting in the invoice being reflected in the recipient’s GSTR-2B statement.
• The purchaser is able to establish that payment for the invoice, including the GST amount, was made through banking channels or any other prescribed mode of payment.

Where these conditions are fulfilled, tax authorities would recover the unpaid tax directly from the defaulting supplier instead of initiating ITC reversal proceedings against the purchaser.

Shift from Existing GST Position

The proposal represents a substantial departure from the current legal position under GST.

At present, tax authorities can direct businesses to reverse their input tax credit even after they have paid the full invoice value, including GST, if the supplier subsequently fails to deposit the tax with the government. This has resulted in numerous disputes, with businesses arguing that they cannot be held responsible for the post-sale tax compliance of their suppliers.

The proposed amendment seeks to distinguish genuine purchasers from fraudulent transactions by protecting taxpayers who have acted in good faith and complied with their payment obligations.

Long-Standing Industry Demand

Industry bodies have consistently sought legislative protection against ITC denial in cases where buyers have no practical control over a supplier’s tax compliance after the transaction has been completed.

Businesses have argued that while they can verify a supplier’s GST registration and reconcile invoices through the auto-generated GSTR-2B statement, they have no mechanism to monitor whether the supplier ultimately deposits the tax collected from customers.

The proposal is therefore expected to significantly reduce litigation relating to ITC reversals arising solely from supplier defaults.

Role of GSTR-2B

The proposal places considerable reliance on GSTR-2B, the system-generated statement that reflects eligible input tax credit available to registered taxpayers.

Since GSTR-2B is generated based on invoices uploaded by suppliers, its reflection would serve as evidence that the supplier has reported the transaction. Coupled with proof of payment through banking channels, it would establish that the purchaser has acted diligently and fulfilled its obligations under the transaction.

According to officials familiar with the discussions, documentary evidence of payment would provide objective proof of the purchaser’s bona fide conduct and strengthen protection in genuine cases.

Safeguards Against Tax Evasion

Officials indicated that the existing provision permitting ITC denial was introduced primarily to combat fake invoice rackets and large-scale GST evasion.

The government remains concerned about fraudulent ITC claims, and therefore the proposed relief is intended only for genuine purchasers who can demonstrate that they completed legitimate commercial transactions and paid the applicable GST.

Under the revised approach, enforcement efforts would shift toward recovering unpaid tax from the defaulting supplier rather than penalising compliant buyers.

Proposal Awaits GST Council Approval

With both the Fitment Committee and the Law Committee having approved the proposal, it is expected to feature on the agenda of the next GST Council meeting.

The Council will take the final decision on whether a bona fide purchaser should continue to bear the consequences of a supplier’s tax default or whether recovery should instead be pursued exclusively against the defaulting supplier.

If adopted, the reform is expected to provide significant certainty to businesses, reduce litigation over ITC reversals, strengthen taxpayer confidence in the GST framework, and strike a better balance between preventing tax evasion and protecting genuine taxpayers.

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