July 11, 2026: In a significant move aimed at improving ease of doing business, the GST Law Committee has reportedly approved a proposal that would protect genuine buyers from losing Input Tax Credit (ITC) if their suppliers fail to deposit Goods and Services Tax (GST) with the government.

Author: Aadarsh Patel | EQMint

The proposal addresses one of the most debated issues under the GST regime, where compliant businesses often face denial of ITC despite having paid GST to their suppliers and possessing valid tax invoices.

If approved by the GST Council, the reform could provide long-awaited relief to businesses across sectors while improving confidence in India’s indirect tax system.

What Is the Proposed Change?

Under the proposed framework, a buyer’s Input Tax Credit would remain protected if:

• The purchase is genuine.
• The buyer has paid the supplier through banking channels.
• A valid GST invoice has been issued and reported.
• The buyer has fulfilled all compliance requirements.

In such cases, tax authorities would pursue recovery directly from the defaulting supplier instead of denying ITC to the purchaser.

The proposal seeks to ensure that honest taxpayers are not penalized for non-compliance committed by another party.

Why Is This Proposal Important?

Since the implementation of GST, businesses have frequently raised concerns that buyers have little control over whether suppliers actually deposit collected GST with the government.

Even after:

• Paying GST,
• Receiving goods or services,
• Holding valid invoices, and
• Completing payment,

buyers have sometimes faced ITC reversals because suppliers failed to remit taxes.

The proposed amendment aims to correct this imbalance by distinguishing between fraudulent transactions and genuine commercial dealings.

Major Relief for Businesses

If implemented, the proposal is expected to benefit:

• Manufacturers
• MSMEs
• Exporters
• Traders
• Service providers
• Large corporates

Businesses would gain greater certainty over tax credits, improving working capital management and reducing litigation.

Industry experts believe the change could significantly lower compliance disputes while encouraging smoother business transactions.

Impact on GST Compliance

The proposal does not relax compliance requirements for suppliers.

Instead, it shifts enforcement toward defaulting taxpayers by allowing authorities to recover unpaid GST, interest and penalties directly from non-compliant suppliers.

This approach strengthens accountability while protecting compliant businesses.

Alignment With Judicial Developments

The proposal also reflects the evolving judicial view that bona fide purchasers should not automatically lose tax credits due to supplier defaults when they have acted in good faith and fulfilled their statutory obligations.

Several court rulings in recent years have emphasized that tax authorities should distinguish genuine transactions from fraudulent arrangements before denying ITC.

The proposed amendment could provide greater legal clarity and reduce future disputes.

What Happens Next?

The recommendation made by the GST Law Committee is expected to be placed before the GST Council for consideration.

If approved, the proposal would require amendments to the GST framework before becoming effective.

Businesses are likely to closely monitor upcoming GST Council meetings for further clarity on implementation timelines and eligibility conditions.

EQMint Analysis

The proposal marks one of the most business-friendly reforms under the GST regime since its introduction. Protecting Input Tax Credit for genuine buyers addresses a long-standing concern that has affected businesses despite full compliance on their part.

By shifting recovery efforts toward defaulting suppliers instead of compliant purchasers, the reform has the potential to improve tax certainty, reduce litigation and strengthen trust in the GST ecosystem.

If approved by the GST Council, the amendment could significantly enhance India’s ease of doing business while reinforcing the principle that tax liability should primarily rest with the party responsible for the default.

FAQ

What is Input Tax Credit (ITC)?

Input Tax Credit allows businesses to claim credit for GST paid on purchases against their GST liability on sales.

What has the GST Law Committee proposed?

It has proposed protecting genuine buyers from losing ITC when suppliers fail to deposit GST, provided the buyer has complied with applicable requirements.

Will defaulting suppliers still face action?

Yes. Tax authorities would continue to recover unpaid GST, interest and penalties from defaulting suppliers.

Has the proposal become law?

No. The proposal is yet to be considered and approved by the GST Council before any legal amendments take effect.

Who will benefit if the proposal is approved?

Manufacturers, MSMEs, exporters, traders, service providers and other GST-registered businesses are expected to benefit from greater certainty regarding ITC claims.

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