Introduction
The GST registration process is straightforward, but understanding its laws and provisions can be challenging. Meanwhile, ITC (Input Tax Credit) is a comprehensive process where registered taxpayers claim GST paid on goods or services. But what if ITC is denied due to supplier tax default? The recent case in Bhandari Scrap Traders ( 24 July 2026) upheld Section 16(2)(C) of the CGST Act: a buyer cannot claim the ITC (Input Tax Credit unless their supplier has paid the tax to the government.
The Supreme Court (SC) of India argued that buyers can reclaim the ITC (Input Tax Credit) once the defaulting supplier clears the pending tax liabilities, as mandated under Sections 41, 73, and 74 of the CGST Act. Let's dive into this guide to know why Bhandari Scrap Traders ( 24 July 2026) is trending and what the actual final words of the HC of India are related to this viral case.
Key Takeaways
- The government tax department, Union of India & Ors. responded to “Bhandari Scrap Traders” by sending the notice to reverse the ITC (Input Tax Credit).
- The supplier failed to deposit the GST which it collected from “Bhandari Scrap Traders”.
- The Supreme Court upheld Section 16(2)(C)under the CGST Act, 2017 as valid and constitutional.
- The trader can still reclaim the ITC once the authority recovers the tax from the supplier who is responsible for the default.
- Unless GST is recovered from the supplier, the buyer is responsible to deposit with 18% interest.
What Is Section 16(2)(C)of the CGST Act?
Section 16(2)(C) in the CGST Act is an important legal provision in the Indian tax law. This section deals with rights for availing input tax credit by registered persons.
For claiming the input tax credit, the ultimate seller must have paid the taxes to the government. One does not need to see if the buyer has a valid tax invoice or not; he cannot claim input tax credits until the seller deposits the GST to the government (required to file the GSTR-3B). The provisions of this section are given below: Provisions Under Section 16(2)(C) of the CGST Act.
“ Section 16(2)(c): Subject to the provisions of Section 41, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply.”
Reversal Mechanism (Rule 37A & Section 41)
Rule 37A & Section 41 highlight that if the seller files their sales returns (GST-1) but skips filing the Tax return payment (GSTR-3B), then the buyer is responsible for reversing the claimed ITC. In this situation, the buyer not only pays the GST but is also charged interest at a rate of 18%. On the other hand, the buyer can reclaim the ITC if the defaulter seller deposits the tax with the government.
Also Read: GSRT 9C Reconcillation Statement
The Bhandari Scrap Traders Case: Explained
The Supreme Court of India responded and made the judgment on the validity of Section 16(2)(C)of the Central Goods and Services Tax (CGST) Act, 2017, in July 2026, marking it as completely constitutional.
Who is the Party?: The "Bhandari Scrap Traders" made the petition against the Union of India after receiving the notice to reverse the ITC (Input Tax Credit). The case, which is associated with a batch of Special Leave Petitions (SLPs), came into headlines after it approached the Supreme Court. However, this case pointed to the prior case led by Maruti Enterprises v. Union of India, discussed in the Gujarat High Court after arguments related to receiving the notice to reverse the Input Tax Credit (ITC) even after fulfillment of all GST requirements from the seller side.
The Involvement of Gujarat High Court
Maruti Enterprise v. Union of India is a landmark judgment given by the Gujarat High Court (and later verified by the Supreme Court of India) regarding the constitutional validity of Section 16(2)(c) of the CGST Act, 2017. The following are the major foundational remarks made by the Gujarat High Court:
- The buyer can claim the ITC only when the seller/vendor deposits the mandatory tax on the GST portal in India.
- The judgment stated that ITC is only a privilege for the buyers but not an inherent constitutional right. Further, the Parliament has full rights to make a strict legal framework related to ITC (Input Tax Credit).
- The court confirmed that the current GST fundamental rules differ much from the older state VAT regime. It determined that the buyers are responsible and have to bear the burden of the supplier’s non-compliance defaults to cover the revenue leakage.
The Supreme Court Decision
Justice Sanjay Kumar and Justice Sanjeev Sachdeva of the Supreme Court dismissed the batch of SLPs (Bhandari Scrap Traders v. Union of India & Ors.). As per the decision of the Supreme Court, claiming ITC is a statutory privilege, not an inherent constitutional right. The Supreme Court further admitted that Parliament holds full rights to make strict provisions or remove it required- includes bearing the burden of suppliers' compliance. Furthermore, Section 41 read with Rule 37A, alongside recovery proceedings against defaulting suppliers under Sections 73 and 74, highlights that the buyer who is forced to reverse the ITC can re-avail that credit once the tax is recovered from the seller.
What Are the Final Words of the Supreme Court?
With the Gujarat High Court’s reasoning, the Supreme Court made a complete and respectful decision that claims:
- The Supreme Court remarked that Section 16 (2) (C) is constitutionally valid and there is no requirement to read down its provisions.
- There is a huge difference between the current GST scheme and the old VAT regime. Therefore, precedents safeguarding bona fide buyers under VAT law cannot simply be fixed into GST.
- According to the clauses found in Section 41, 73, and 74 of the CGST Act, the GST department does have the power to recover taxes from those suppliers who default in their tax payments.
- The court mandated that the authorities create an effective real-time verification mechanism in order to help honest buyers avoid getting trapped repeatedly.
What To Do If You Receive the Reverse ITC Notice?
The tax governing authority usually issues a GST notice or communication to buyers/vendors to reverse the ITC (Input Tax Credit) due to supplier defaults. The default is highlighted under Section 16 (2)(C) read with Rule 37A. The authority further issues the notice for payment if the supplier failed to file the GSTR-3B by the last deadline of November 30 of the financial year. If you are a buyer and face a similar situation, you must consider these points to solve these hurdles:
1: Identify the Notice Nature
In case you receive any notice via email or on the GST portal regarding reversing the ITC or any other query, you must ensure what the deadline of the notice is and how to respond (mechanism to respond). If you receive the notice when the supplier files the GSTR-1 but omits the GSTR-3B.
2: Verify the Vendor and Buyer Payment
Must ensure you paid the complete invoice amount (including 18% GST) to the vendor within 180 days of the invoice date. Further, verify the vendor’s GSTIN on the portal to know whether they file the GSTR-3B.
3: Ensure the Vendor Filed GSTR-3B
Filing the GSTR-1 is not the final compliance requirement, but the vendor is also required to file the GSTR-3B. If the vendor fails to file the GSTR-3B on the due date, receive a notice to reverse the ITC. Fulfil all notice requirements and file a reply via Form GST ASMT-11(attach GSTR-3B filing proof ) to close the notice.
4: Track for Re-Availment
Track the status if you get the notice for ITC reversal. Once the defaulting supplier files the GSTR-3B or the authority receives the tax, then you must apply again to reclaim 100% of the ITC (Input Tax Credit).
Conclusion
The "Bhandari Scrap Traders" case related to ITC made a lot of noise after attending it in the Supreme Court, as debate surrounding Section 16(2)(C) of the CGST Act. In response, the Supreme Court stated that Input Tax Credit is a statutory privilege, not an absolute right. The registered buyer is responsible for bearing the burden of vendor non-compliance (failure to deposit the tax to the government) and cannot even claim ITC unless tax formalities are clear. However, the buyer can avoid this burden by screening vendor status such as real-time GSTR-2B reconciliation, making automated payment-withholding strict protocols, and rapid action on statutory actions. Avoid cash flow issues or possible heavy penalties with JustStart, as we provide end-to-end GST compliance and legal notice-reply support.
Frequently Asked Questions (FAQs)
Q1. What is GST registration in India?
Ans. GST registration is a process to secure the 15-digit Goods and Services Tax Number (GSTIN), which allows you to collect the tax from buyers, claim tax credits, and be eligible to legally trade.
Q2. How to register for GST online?
Ans. The GST registration process is completely free on the GST portal. Apply for registration by filing the GST REG-01 application form. It typically takes 3-7 working days to issue the GSTIN.
Q3. What is Section 16(2)(C) of the CGST Act?
Ans. Section 16(2)(C) of the CGST Act is a legal provision that states that registered buyers cannot claim the ITC unless the supplier deposits the collected tax to the government.
Q4. Is Section 16(2)(C) of the CGST Act unconstitutional?
Ans. No, Section 16(2)(C) is not unconstitutional, as the Supreme Court of India upheld its constitutional validity.
Q5. When can I claim ITC (Input Tax Credit)?
Ans. The taxpayers can apply to claim ITC (Input Tax Credit) in their monthly or quarterly GSTR-3B returns. If somehow you missed the deadline to claim the ITC, you still can claim it on 30th November of the next financial year. The taxpayers are required to meet the specific conditions under Section 16 of the CGST Act to successfully qualify for ITC.
Q6. Can I claim ITC if my supplier deposits tax later?
Ans. Yes, if the supplier has once paid tax, you can reclaim ITC, permitted under Section 41/Rule 37A.
Q7. How can I check if my supplier paid GST?
Ans. To verify whether your supplier paid the GST or not, must verify the GSTR-3B status on the GST portal.
Q8. What documents are required for GST registration?
Ans. For GST registration, you are required to provide the major documents such as PAN card, identity proof documents, address proof, bank account details, and incorporation certificate (if you have registered any company legally, such as private limited or LLP).
Q9. Can I add the GST clauses to my vendor contract?
Ans. Yes, you can definitely add the clause to your vendor contracts. It helps both parties to maintain the tax rules and avoid possible notices due to defaults.
Q10. When should I register for GST?
Ans. Individuals or businesses apply for GST registration when their turnover crosses the threshold limit of ₹40 lakhs for goods and ₹20 lakhs for services (lower limit applied to special category states). Inter-state suppliers are required to obtain a GSTIN regardless of turnover.
