GST’s Default Setting: The Buyer Pays

Under GST, a manufacturer offsets tax on purchased materials against GST due on its sales. A supplier reports the invoice, collects the tax and fails to remit it. Sections 16(2)(c) and 41 of the Central GST Act expose the manufacturer’s input tax credit to reversal. Credit becomes available again after the supplier pays.

Following the GST Council’s 8 October meeting, a Department of Revenue official confirmed an officers’ committee’s review of protection for genuine purchasers. The Supreme Court upheld the supplier-payment condition in July. In October, the Punjab and Haryana High Court required officers within its jurisdiction to examine the transaction and supplier-recovery proceedings before reversing credit. Judicial safeguards constrain enforcement; they leave the buyer exposed to a later supplier default.

An invoice in the buyer’s GST statement proves supplier reporting, not remittance. Registration, delivery and banking records are available to the purchaser; invoice-level confirmation that the supplier paid the government is not.

The legislative option is a defined exception, not unconditional credit. A purchaser satisfying the other credit conditions and documenting genuine supply, traceable payment, a reported invoice and reasonable checks at purchase or credit claim retains credit despite supplier default. Under that proposed rule, Revenue defeats protection by establishing collusion or that the buyer knew, or ought reasonably to have known, that the purchase was connected to tax fraud. The law specifies the diligence test and each side’s evidentiary burden.

The reform requires changes to credit eligibility, reversal and proof rules under applicable central and state GST laws. Recovery against the supplier proceeds independently. Unrecovered tax on a protected purchase becomes a loss to public revenue. A credible Council recommendation states the fraud threshold and estimates the fiscal exposure.