13 - 10 - 2026

Genuine buyers caught in GST’s trust deficit as Council examines tax credit rule

In the world of taxation, honesty is supposed to be rewarded. Under the GST regime, however, a businessman may pay his supplier, collect the invoice, fulfil his obligations and still find himself fighting for the tax credit he believes is rightfully his. The reason may be simple: the supplier has failed to deposit the tax with the government.

This uncomfortable question is now before an officers’ committee, which has been given three months to examine the contentious provision under Section 16(2)(c) of the GST law. The GST Council will consider the issue after the committee submits its findings.

Balasubramanian Krishnamurthy, Joint Secretary (TPRU, ST & FATF) in the Department of Revenue, Ministry of Finance, disclosed this at the interactive session, The GST Reset: A Dialogue across Government, Industry and Tax Professionals.

The dilemma is not difficult to understand. A buyer purchases goods, pays the invoice, including GST, and keeps the necessary records. He may have little knowledge of what happens next in the supplier’s accounts. If the supplier fails to remit the tax, must the buyer pay the price for somebody else’s failure?

That is the question confronting businesses under Section 16(2)(c), which makes the payment of tax to the government a condition for claiming input tax credit (ITC). For the tax authorities, the provision serves an obvious purpose: preventing revenue leakage and discouraging transactions with non-compliant suppliers. For businesses, it raises a less comfortable prospect—that compliance on one’s own part may not always be enough.

Who bears the burden?

The distinction between a dishonest transaction and an honest purchase followed by a supplier’s default is therefore central to the debate. The government must protect its revenue, but businesses argue that the burden should not automatically fall on those who have paid for their purchases and possess the documents to establish them.

Asked about the practical difficulties arising from the provision, Krishnamurthy declined to disclose the committee’s deliberations.

“It would not be fair for me to comment on what was discussed because it is still confidential. The minutes are being drawn up. Once the minutes are approved, they will be in the public domain,” he said.

For businesses, the eventual decision will be about more than a clause in a tax statute. Denial of ITC can lock up working capital, increase the cost of transactions and lead to prolonged litigation. For smaller enterprises, the consequences can be particularly severe, as a disputed credit may mean money unavailable for wages, purchases or expansion.

The broader question is whether a tax system built on digital records and compliance can distinguish effectively between deliberate evasion and a buyer who has done what the law requires of him. A rule designed to prevent fraud must also contend with the possibility that its application could penalise those it was never intended to catch.

Krishnamurthy said the government’s efforts extended beyond rationalising GST rates to simplifying procedures and building a more trust-based compliance framework. The reforms cover registration, return filing, refunds and dispute resolution, with the stated aim of easing the burden on taxpayers and encouraging businesses to remain within the formal economy.

He said taxable supplies had grown by around 26 per cent between October and August compared with the corresponding period a year earlier, while GST revenue growth stood at around 15 per cent in the second quarter of the current financial year.

The figures point to the expanding reach of the tax system. The unresolved ITC question, meanwhile, points to the importance of ensuring that compliance does not become a one-sided obligation.

The officers’ committee has three months to examine the issue. Its recommendations will go before the GST Council, which will have to weigh the competing claims of revenue protection and fairness to genuine taxpayers.

The principle at stake is straightforward, even if the legal solution is not: the government should not lose tax revenue because a supplier defaults. But neither should an honest buyer be left wondering whether paying his bills and keeping his books in order is enough to stay on the right side of the taxman.

By B D Narayankar

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