GST Rule Change May Protect Honest Buyers From Losing Input Tax Credit
GST Rule Change May Protect Honest Buyers From Losing Input Tax Credit
A proposed amendment cleared by the GST Council’s Law Committee could ensure that genuine businesses no longer lose Input Tax Credit because of suppliers who fail to deposit GST with the government.
By Vidhi Lalla
Pune:Businesses across India may soon receive major relief under the Goods and Services Tax (GST) regime, as a key proposal approved by the GST Council’s Law Committee seeks to protect buyers from losing their Input Tax Credit (ITC) when suppliers fail to deposit the tax collected from customers.
The proposal, which is expected to be placed before the GST Council for final approval in the coming weeks, addresses a long-standing concern of businesses that were being penalised despite having fulfilled all their tax obligations.
Under the existing system, a buyer may lose ITC if a supplier collects GST but does not deposit it with the government. This often leaves genuine businesses facing tax demands, interest and penalties even though they have already paid the supplier, creating financial stress and locking up working capital.
The proposed amendment aims to shift the responsibility onto the defaulting supplier instead of the buyer. If approved, buyers would be allowed to retain their ITC provided they have fulfilled specified compliance conditions, including ensuring that the supplier has reported the invoice in GSTR-2B and making payments through recognised banking channels with supporting documents.
Tax authorities would then recover unpaid GST directly from the supplier rather than denying credit to the purchaser.
The move is expected to reduce litigation and improve ease of doing business by protecting compliant taxpayers from the consequences of another party’s default. Industry bodies and trade organisations have repeatedly demanded such a change since the implementation of GST, arguing that buyers have no practical control over whether suppliers deposit collected taxes with the government.
The proposal has reportedly received approval from the GST Council’s Law Committee after earlier being examined by the Fitment Committee. A final decision is expected at an upcoming meeting of the GST Council.
Business experts believe the amendment could significantly improve cash flow for companies, particularly small and medium enterprises (SMEs), which often struggle when ITC claims are blocked due to supplier non-compliance.
What the proposed rule means
| Current system | Proposed change |
|---|---|
| Buyer may lose ITC if supplier fails to deposit GST | Buyer can retain ITC if prescribed compliance conditions are met |
| Buyer often faces tax demand despite paying supplier | Recovery action will primarily target the defaulting supplier |
| Working capital gets blocked | Better cash flow for businesses |
| Higher litigation | Fewer disputes involving genuine taxpayers |
Why the proposal matters
- Protects honest businesses from supplier defaults.
- Improves liquidity by preventing unnecessary ITC reversals.
- Reduces legal disputes and compliance uncertainty.
- Encourages digital and banking-channel transactions.
- Supports the government’s Ease of Doing Business initiative.
What businesses should continue doing
Even if the amendment is approved, tax professionals advise businesses to:
- Purchase only from GST-compliant suppliers.
- Regularly reconcile GSTR-2B with purchase records.
- Make payments through banking channels.
- Maintain invoices, payment proofs and contracts.
- Periodically review vendors’ GST compliance status.
Disclaimer: The proposal has been cleared by the GST Council’s Law Committee but has not yet become law. It will come into effect only after approval by the GST Council and notification by the government.
