Supreme Court upholds constitutional validity of Section 16(2)(c) of CGST Act and declines to read down its provisions

This Tax Alert summarizes a recent ruling of the Supreme Court (SC) ^[1] on the validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act), which disentitled the recipient from availing input tax credit (ITC) where the supplier fails to pay tax to the Government.

Gujarat HC ^[2] upheld the constitutional validity of section 16(2)(c) and refused to read down the provision, holding that ITC can be denied in the hands of recipient since it is a statutory concession subject to prescribed conditions. Aggrieved by the same, assessee filed Special Leave Petition (SLP) before the SC.

In another case, Tripura High Court ^[3] had earlier held that while Section 16(2)(c) is constitutionally valid, it should be read down so that ITC is not denied to a bona fide purchaser merely because the supplier failed to pay tax to the Government.

The key observations of the SC are:

• While a SLP has been admitted against the Tripura HC judgement, the detailed exercise undertaken by the Gujarat HC was not undertaken by the Tripura HC.
• The Gujarat HC analyzed the difference between the corresponding provisions under the Delhi VAT Act (read down by Delhi HC ^[4] and affirmed by SC ^[5]) and the CGST Act, along with the GST ITC framework, and found no basis to equate a purchasing dealer under the CGST Act with a bona fide purchaser under the Delhi VAT Act where the supplier defaults on tax payment.
• Gujarat HC also referred to Sections 41, 73 and 74 of the CGST Act in the context of purchasing dealer which enables it to re-avail reversed ITC after the supplier discharges the tax liability.

Basis above, SC dismissed the appeal and upheld the Gujarat HC judgement holding that no grounds were made out to declare Section 16(2)(c) unconstitutional or to read down the provision.

Comments:

• SC ruling provides judicial support to the constitutional validity of section 16(2)(c) of the CGST Act and reinforces the statutory linkage between ITC entitlement and actual payment of tax to the Government.
• The judgement is likely to impact all pending disputes involving denial or reversal of ITC on account of suppliers’ default, particularly where taxpayers have relied on principles developed under the erstwhile VAT regime.
• Businesses may need to strengthen vendor-level controls to safeguard ITC, including periodic checks of suppliers’ return filing status on the GST portal and appropriate contractual safeguards, such as indemnity clauses, to address potential tax, interest or penalty exposure arising from suppliers’ default.

^{[1]TS-538-SC-2026-GST
[2]2026-TIOL-623-HC-AHM-GST
[3](2026) 38 Centax 116 (Tripura)
[4][2018] 10 GSTL 182 (Del)
[5]2018-TIOL-11-SC-VAT and 2025-TIOL-77-SC-VAT}