Section 16(2)(c): can your ITC be denied because the supplier did not pay tax?
The most common GST demand in India today punishes a buyer for a seller's default. It is also the demand most often set aside.
No, not automatically. Section 16(2)(c) makes payment of tax by the supplier a condition for credit, but the department must first proceed against the defaulting supplier. Where the buyer holds a tax invoice, has received the goods or services and has paid through banking channels, several High Courts have set aside the demand on the buyer.
The notice that arrives every Monday
A manufacturer in Gujarat receives DRC-01. The allegation is short. Credit of 84 lakh was availed on invoices from four suppliers who did not discharge their output tax.
The manufacturer did nothing wrong. It placed orders, received material, paid by RTGS including tax, and reported everything. The supplier collected the tax and disappeared.
The department wants the money from whoever is still solvent. That is the whole theory of the notice.
What the statute actually says
Section 16(2) opens with a non obstante clause and lists four conditions. Clause (c) requires that the tax charged on the supply has been actually paid to the Government, in cash or through utilisation of credit.
Read alone, the clause is brutal. It makes a buyer's credit hostage to a seller's conduct, over which the buyer has no control and no visibility beyond GSTR-2B.
But clause (c) does not sit alone. Section 155 places the burden of proving eligibility on the person claiming credit. Sections 73, 74 and 79 give the department a full recovery machinery against the person who collected the tax and kept it.
The question is therefore not whether the condition exists. It is whether the department may skip the defaulter and come straight to you.
Where the courts have drawn the line
The Calcutta High Court in Suncraft Energy Private Limited answered that question in 2023. The department had reversed a buyer's credit purely on a GSTR-2A mismatch. The Court held that the authorities must first proceed against the supplier, and may act against the recipient only in exceptional situations such as collusion or a missing supplier.
The Supreme Court declined to interfere with that view. Several High Courts have since followed the same approach where the buyer's documentation was intact.
The counterweight is State of Karnataka v. Ecom Gill Coffee Trading, decided by the Supreme Court in 2023 under the Karnataka VAT Act. The Court held that a purchasing dealer claiming credit must prove the genuineness of the transaction, and that producing invoices and payment particulars is not by itself enough. Departments quote Ecom Gill in almost every ITC notice.
Both decisions can stand together. Ecom Gill tells you what you must prove. Suncraft tells the department whom it must chase first. The taxpayer who loses is the one who cannot prove the supply actually happened.
The Three Layer Credit Defence
Every ITC defence I have built in the last four years rests on three layers. Miss one and the file collapses.
The first layer is existence. Purchase order, tax invoice, e-invoice IRN, e-way bill, lorry receipt, weighbridge slip, gate entry, GRN, quality inspection record. This proves movement, not just paper.
The second layer is consumption. Stock ledger, production record, cost sheet, and the corresponding outward supply on which you paid tax. A department cannot comfortably allege a fake purchase that produced a real sale on which it collected revenue.
The third layer is diligence. GSTIN status screenshots taken at the time of the transaction, GSTR-2B reflecting the invoice, banking channel payment, and correspondence chasing the supplier once the mismatch appeared.
Build all three before you draft a word of the reply. The reply is only as strong as the annexures behind it.
What the amnesty changed, and what it did not
Section 128A waived interest and penalty for demands under Section 73 for the financial years 2017-18 to 2019-20, where the tax was paid within the notified window. For a large number of 16(2)(c) demands raised for those years, that was the commercially correct exit.
It was not an admission that the demand was good in law. It was arithmetic.
For the later years the arithmetic changed. Interest under Section 50(3) and penalty under Section 122 now sit on top of the tax, and the appeal route runs through the Tribunal, which is functioning. Contesting is again worth doing where the three layers hold.
Exhibit 1 — Where 16(2)(c) demands are won and lost
| Fact pattern | Buyer's evidence | Typical outcome |
|---|---|---|
| Supplier filed GSTR-1, did not file GSTR-3B | Invoice in 2B, banking payment, goods records complete | Demand on buyer set aside; department directed to proceed against supplier |
| Supplier registration cancelled retrospectively after the supply | GSTIN active on the date of supply, records complete | Relief granted in several High Courts; retrospective effect cannot travel to the buyer |
| Supplier untraceable, no premises, no returns from inception | Invoices and payments only | Demand usually sustained; existence of supply not proved |
| Invoice value paid in cash or through circular banking loops | Payment trail circular or absent | Demand sustained with penalty under Section 122(1)(vii) |
| Statement of the supplier alleging accommodation invoices | No cross examination offered | Strong ground of natural justice; matter usually remanded |
Outcomes are indicative of the reported trend across High Courts and are not a substitute for advice on your own facts.
Authorities relied on
Credit cannot be reversed in the hands of the buyer on a mere 2A mismatch without first proceeding against the supplier.
The dealer claiming credit must prove the genuineness of the transaction; invoices and payment particulars alone are insufficient.
Retrospective cancellation of a supplier's registration cannot by itself defeat a bona fide buyer's credit; the matter must be examined on documents.
What to do on Monday
Pull a supplier wise GSTR-2B versus books reconciliation for every year still within limitation. Identify suppliers with a 1 to 3B gap before the department does.
For every supplier on that list, assemble the three layers now. Evidence collected after a notice always looks assembled after a notice.
Insert a tax indemnity and a credit recovery clause into your purchase terms, with a right to withhold the tax component until the invoice appears in your 2B.
Where a reversal has already been made under pressure, examine a refund claim or a rectification under Section 161 within the applicable period.
This page states the general position. A reader with a specific question on their own facts may write to the GST practice at AMLEGALS.
Write to the GST practiceQuestions we are asked on this
Can the department recover from me when the supplier is under insolvency?
It can raise the demand, but the argument for you is stronger. Show the claim filed before the resolution professional and the department's own ability to lodge a claim. Insolvency of the supplier is not collusion by you.
Is a GSTR-2B reflection enough to protect my credit?
No. 2B proves the invoice was reported. It does not prove tax was paid to the Government, and it does not prove the goods moved. Keep the movement and consumption records.
Should I reverse the credit under protest?
Only after quantifying interest exposure. A reversal in DRC-03 without a covering letter recording that it is under protest and without prejudice is routinely read as an admission.
Does Section 16(2)(c) apply to services as well?
Yes. The condition is drafted for supplies generally. For services, the consumption layer is built through deliverables, timesheets, reports and the output supply that used them.
What is the limitation for a 16(2)(c) demand for FY 2021-22?
It depends on whether the department invoked Section 73 or Section 74, and on the extension notifications applicable to that year. Check the order date against the notified limitation for that specific year before arguing merits.
In this cluster
- Input tax credit under GST: the complete 2026 position
- Section 16(4) time limit for claiming ITC: what survives after the amnesty
- GSTR-2A and 2B mismatch notices: how to answer without conceding
- Blocked credits under Section 17(5): the clause by clause map
- Safari Retreats: what the Supreme Court decided on ITC for construction, and what Parliament then undid
- ITC on canteen, transport, insurance and other employee benefits
- ITC reversal under Rules 42 and 43: working the formula correctly
- Rule 37: ITC reversal when you do not pay your supplier within 180 days
- Rule 37A: reversal where your supplier did not file its GSTR-3B
- Rule 86A blocking of the electronic credit ledger: the remedies that actually work
GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.