ITC Reversal for Supplier’s Tax Default: What You Need to Know
Input Tax Credit (ITC) is the backbone of GST, but it comes with strict compliance. One of the biggest risks for buyers is ITC reversal for supplier’s tax default — especially if the supplier doesn’t pay tax or fails to file GSTR-1/GSTR-3B properly. In such cases, the recipient may have to reverse the credit even if goods or services were received.
Let’s break this down using rules, case laws, and practical tips.
When Can ITC Be Reversed Due to Supplier Default?
As per Section 16(2)(c) and 16(2)(aa) of the CGST Act, ITC is available only if:
- The supplier has paid the tax to the government
- The invoice is reflected in GSTR-2B
- The recipient is in possession of a valid tax invoice
- The goods/services have been received
If any of the above is not met — especially if the supplier fails to remit tax or file returns, the department can demand ITC reversal from the recipient.
Relevant Legal Provisions & Clarifications
| Provision / Source | Key Takeaway |
|---|---|
| Section 16(2)(c) CGST Act | No ITC if tax is not paid to govt |
| Section 16(2)(aa) | Invoice must appear in GSTR-2B |
| Rule 36(4) | Restricts ITC to eligible amount in GSTR-2B |
| CBIC Circular No. 183/15/2022-GST | Clarified matching requirement for availing ITC |
| Supreme Court – UOI v. Bharti Airtel Ltd. (2021) | Matching of ITC is a statutory requirement |
Practical Triggers for ITC Reversal
You may face reversal in these cases:
- Supplier filed GSTR-1 but didn’t file GSTR-3B
- Invoice not appearing in your GSTR-2B
- Tax not paid by the supplier
- Supplier deregistered or invoice is fake
- Department issued DRC-01A or DRC-01 proposing reversal
What If You Have All Documents?
Even with a valid invoice and proof of payment, ITC can still be denied if:
- Supplier didn’t pay tax
- Transaction not reflected in GSTR-2B
This has led to hardship for genuine buyers — a point raised in multiple High Court cases.
Key Case Laws to Note
| Case | Court | Verdict |
|---|---|---|
| D.Y. Beathel Enterprises v. STO (Madras HC, 2021) | No automatic reversal if recipient proves payment; dept must first proceed against supplier | |
| Suncraft Energy v. Assistant Commissioner (Calcutta HC, 2023) | Reversal upheld where supplier didn’t remit tax, even if buyer paid | |
| LGW Industries v. UOI (Calcutta HC, 2022) | Held ITC is conditional on tax payment by supplier |
👉 Expert View: Always verify suppliers’ compliance using GSTR-2B matching and restrict ITC claim to that extent.
How to Protect Yourself: Compliance Checklist
✔️ Choose vendors with good compliance rating
✔️ Reconcile GSTR-2B monthly before claiming ITC
✔️ Avoid vendors showing mismatch in GSTR-1 vs. GSTR-3B
✔️ Use GSTN’s vendor compliance tracker
✔️ Document payment proof, delivery records, and invoice trail
✔️ Maintain correspondence in case of default — useful during audit
What to Do If ITC Is Denied
- Respond to DRC-01/DRC-01A with all evidence
- File reply using DRC-06 online
- Escalate to appellate authority if reversal is unjustified
- Use Section 107 CGST Act for appeal
FAQ: ITC Reversal for Supplier’s Tax Default
Q1: Can I claim ITC if supplier filed GSTR-1 but not GSTR-3B?
No. If tax is not paid via GSTR-3B, ITC can be denied.
Q2: My supplier is untraceable. Do I still need to reverse ITC?
Yes, unless you can prove genuine effort, delivery, and payment with supporting evidence.
Q3: Is there a time limit for reversal or re-claim of ITC?
Yes. ITC can be reclaimed in future periods if reflected in GSTR-2B and other conditions are met.
Summary
ITC reversal for supplier’s tax default can affect genuine buyers. Understand GST rules, court judgments, and how to protect your claim if the supplier fails to remit tax or file returns.
Final Thoughts
In GST, compliance is not just your responsibility — your supplier’s track record matters too. To avoid reversal and penalties, maintain strong documentation, match GSTR-2B before claiming ITC, and stay updated with CBIC clarifications.