NEW DELHI: For nearly nine years since the Goods and Services Tax (GST) was rolled out in July 2017, businesses across India have grappled with what many considered one of the most unfair features of the new indirect tax regime.
Even after paying a supplier in full - including the GST component - a buyer could still lose the input tax credit (ITC) if the supplier failed to deposit the tax with the government.
That long-standing grievance may finally be headed for a resolution. The GST Council's law committee has reportedly cleared a proposal to protect buyers from losing ITC where they have acted in good faith by paying the supplier
This s despite the buyer having paid through banking channels and where the supplier has reported the invoice, resulting in its reflection in the buyer's GSTR-2B statement.
If approved by the GST Council, tax authorities would recover the unpaid tax from the defaulting supplier instead of denying credit to the purchaser.
Why has this been such a contentious issue?
The dispute centres on one of GST's most fundamental promises—that businesses should receive seamless credit for the tax they pay on purchases.
Consider a manufacturer buying raw materials worth Rs11.8 lakh, including Rs1.8 lakh GST. The manufacturer receives the goods, pays the supplier through the banking system, records the purchase in its books and claims the Rs1.8 lakh as input tax credit.
Months later, the tax department discovers that the supplier never deposited the GST collected from the buyer. Under the existing legal framework, the department can ask the buyer to reverse the Rs1.8 lakh credit, often with interest and, in some cases, penalties—even though the buyer has already paid the tax to the supplier.
For businesses, the argument has always been simple: once the tax has been paid as part of the invoice, how can a purchaser be expected to monitor whether the supplier subsequently deposits that amount with the government?
That question has fuelled years of litigation, representations by industry bodies and repeated demands for a change in the law.
So why did it take nearly nine years?
The answer lies in the government's battle against fake invoicing.
From the early years of GST, authorities uncovered large-scale fraud involving shell companies issuing invoices without supplying goods or services. These fake invoices enabled fraudulent claims of input tax credit worth thousands of crores of rupees, making ITC fraud one of the biggest threats to GST revenues.
Faced with this challenge, the government tightened compliance norms and increasingly linked a buyer's eligibility for ITC to the supplier's tax compliance.
While the approach helped protect revenue, it also meant that genuine businesses were sometimes caught in the crossfire, losing tax credit despite having no role in the supplier's default.
Another hurdle was the evolution of the GST technology platform.
When GST was launched, the invoice-matching mechanism originally envisaged under the law was never fully implemented. Over time, however, the GST Network introduced GSTR-2B, a system-generated statement showing invoices uploaded by suppliers.
The latest proposal builds on this technological maturity. If an invoice appears in GSTR-2B and the buyer can establish payment through banking channels or other prescribed modes, the government appears willing to presume that the buyer acted in good faith.
A shift in GST's philosophy
If approved by the GST Council, the proposal would represent more than a procedural amendment.
For years, the burden effectively rested on the buyer to ensure that the supplier fulfilled his tax obligations—something businesses argued was practically impossible.
The proposed change shifts that burden back to the tax administration. Instead of denying credit to an honest buyer, authorities would pursue recovery from the supplier who actually defaulted.
For many tax professionals, that marks a significant evolution in the GST regime—from prioritising revenue protection at almost any cost to recognising that enforcement should not come at the expense of compliant taxpayers.
The bigger question
The proposal is widely expected to reduce litigation and bring relief to thousands of businesses. Yet it also leaves behind an uncomfortable question.
If buyers were never realistically in a position to monitor a supplier's tax payments, why did it take nearly nine years for the GST system to acknowledge that reality?
