A pending demand of industry for nearly a decade may finally be resolved. Here’s what the Law Committee approved, why it matters, and what it means for your GST compliance and litigation strategy.
What Happened on 10 July 2026
The Law Committee of the GST Council has approved a proposal aimed at protecting a buyer’s Input Tax Credit (ITC) in situations where the supplier has failed to deposit the corresponding tax with the government, according to a report by the Economic Times citing officials familiar with the deliberations. The clearance came on Friday, 10 July 2026.
Under the approved proposal, a buyer’s ITC would stand protected where two conditions are satisfied: the supplier has reported the invoice such that it reflects in the buyer’s GSTR-2B, and the buyer can demonstrate that payment — including the GST component — was made through banking channels or other prescribed payment documents. In such cases, the tax department would pursue recovery action against the defaulting supplier rather than reversing the credit availed by the purchaser.
In one line: If your supplier’s invoice shows up in your GSTR-2B and you’ve genuinely paid them (including GST) through the banking channel, the department will now be expected to chase the defaulting supplier for recovery — not deny or reverse your credit.
Why This Issue Has Festered for Years
Under the current position, businesses can be asked to reverse ITC even after they have paid the full invoice value — including the GST component — if the supplier subsequently fails to remit that tax to the government. This has been one of the most contentious and litigated aspects of the GST regime since 2017.
Industry bodies, trade associations, and professional bodies including ICAI’s GST & Indirect Taxes Committee have consistently represented that a buyer has virtually no control over a supplier’s post-sale tax compliance and should not be made to bear the consequences of another taxpayer’s default — particularly once GSTR-2B (the system-generated, auto-populated statement of eligible credit) has confirmed the invoice.
The core tension
Section 16(2)(c) of the CGST Act requires that tax charged on a supply must actually be paid to the government before the recipient can retain credit — a condition entirely outside the buyer’s control.
Judicial pushback
Several High Courts — including in cases along the lines of the Calcutta High Court’s Suncraft Energy line of reasoning — have leaned in favour of protecting a bona fide buyer’s ITC where GSTR-2B reflects the invoice and payment is verifiable.
Why the strict rule existed
Officials note the provision was originally retained because of a large volume of fake-invoicing and tax-evasion cases, where genuine buyer-payment claims were sometimes used as cover for collusive transactions.
What the Proposal Actually Says
The mechanism approved by the Law Committee draws a clear line based on two objectively verifiable facts, rather than leaving the department to reverse credit first and let the taxpayer litigate the recovery later.
Invoice must reflect in GSTR-2B
The supplier must have reported the invoice in their outward supply filings such that it is auto-populated and visible in the buyer’s GSTR-2B — the system-generated statement that has increasingly become the principal document for ITC reconciliation.
Payment through banking channels
The buyer must be able to establish that payment for the supply — including the GST component — was actually made through banking channels or other prescribed payment documents, not merely booked in accounts.
Recovery shifts to the supplier
Where both conditions are met, tax authorities would pursue recovery of the unpaid tax from the defaulting supplier directly, instead of denying or reversing credit in the hands of the purchasing taxpayer.
Before vs. After — At a Glance
Current Position
- ITC can be reversed even if the buyer paid the full invoice value, including GST
- Reversal follows regardless of the buyer’s diligence or lack of control over the supplier
- Buyer bears the burden of litigation to recover reversed credit — often via writ petitions or appeals
- GSTR-2B reflection alone offers no guaranteed protection today
Proposed Position
- ITC protected if invoice reflects in GSTR-2B and payment (with GST) is proven via banking channel
- Recovery action redirected to the defaulting supplier, not the compliant buyer
- Reduces the buyer’s exposure to a third party’s compliance failure
- Still pending formal Council approval and legislative/circular notification
“This was a pending demand of the industry, and the proposal is already cleared by both the committees, and it is likely to be on the agenda of the next council meeting.”
— Senior official, quoted by the Economic Times
What Happens Next PENDING COUNCIL APPROVAL
It is important to be precise about the current status: this is a Law Committee clearance, not yet a GST Council decision, and certainly not yet a notified amendment or circular. The sequence so far, per the report, has been:
| Stage | Status | What it means |
|---|---|---|
| Fitment Committee | Cleared | Reviewed the revenue and rate/structural implications first |
| Law Committee | Cleared — 10 July 2026 | Vetted the legal drafting and workability of the safeguard |
| GST Council | Pending — expected soon | Final political and administrative approval needed before it becomes recommendation |
| Notification / Circular | Not yet issued | Only this stage gives the change the force of law |
Don’t change your compliance approach just yet
- The proposal is not yet law. Section 16(2)(c) continues to apply in its current form until a formal amendment or circular is notified.
- Ongoing assessments, show-cause notices, or appeals on ITC reversal for supplier default should continue to be defended on existing legal grounds — including reliance on favourable High Court precedent where applicable.
- Exact drafting — including whether relief will apply retrospectively to pending disputes — is not yet public and will only be clear once the Council’s recommendation and the subsequent notification are issued.
What It Means for Businesses — If and When Notified
Stronger case for genuine buyers
Businesses that already maintain clean banking-channel payment trails and reconcile GSTR-2B diligently will be best placed to benefit immediately once the safeguard is notified.
Documentation becomes decisive
Bank payment proofs, ledger reconciliations, and GSTR-2B records will likely become the primary evidentiary basis for defending ITC — reinforcing the importance of robust books from day one, not reconstructed later.
Litigation relief, but not blanket immunity
The safeguard is conditional, not absolute — cases involving collusion, fake invoicing, or circular trading are unlikely to get this protection, and the department retains scrutiny powers.
Vendor due diligence still matters
Even with this safeguard, prudent businesses should continue periodic vendor GST-compliance checks — the supplier still faces recovery, and a habitually defaulting vendor is a commercial risk independent of ITC protection.
Our Take: A Practitioner’s View
For businesses currently contesting ITC reversal demands under Section 16(2)(c) — whether at the adjudication, first-appeal, or GSTAT stage — this development is worth watching closely but should not change strategy prematurely. Pending matters should continue to be argued on the existing legal footing, including reliance on the line of High Court decisions that have already favoured buyers who can demonstrate GSTR-2B reflection and genuine banking-channel payment.
Once the Council formally recommends the change and a notification or circular is issued, the immediate priorities for businesses and their advisors should be: (a) auditing existing vendor payment trails to ensure banking-channel evidence is retrievable for past and ongoing transactions; (b) tightening GSTR-2B reconciliation processes going forward so that discrepancies are flagged and followed up with vendors in real time; and (c) reassessing any provisions made in the books for anticipated ITC reversal exposure on account of vendor non-payment.
We will track this story through the next GST Council meeting and publish a follow-up the moment the formal recommendation — and eventually the notification — is out, including guidance on whether relief is likely to apply to pending litigation.
Facing an ITC reversal notice right now?
If you have received a show-cause notice or demand order for ITC reversal on account of a supplier’s non-payment of tax, don’t wait for this proposal to become law. Existing remedies — replies to SCNs, appeals under Section 107, and GSTAT appeals — have statutory timelines that continue to run. Our litigation team can review your matter and advise on the strongest available grounds today.
Quick FAQs
Has this proposal become law yet?
No. As of this report, the Law Committee has only cleared the proposal for consideration. It still requires formal recommendation by the GST Council, followed by a notification or circular to have legal effect.
Will this apply to past ITC reversal orders?
This is not yet clear. Retrospective or prospective application, and any transitional provisions, will only be known once the actual text of the Council’s recommendation and subsequent notification is released.
Does this mean I no longer need to check my vendor’s GST compliance?
No. The safeguard is conditional on GSTR-2B reflection and proof of banking-channel payment — it is not a blanket protection. Cases involving suspected collusion or fake invoicing will likely remain outside its scope, so vendor due diligence remains a sound practice.
What should I do if I’m currently disputing an ITC reversal demand?
Continue to pursue your existing remedy (reply to SCN, first appeal, or GSTAT appeal as applicable) on the law as it stands today, while keeping this development on record as a supporting policy indicator. Consult your GST advisor before relying on this proposal as a standalone defence, since it has not yet been notified.