Supplier tax default should not hurt genuine businesses: Industry body
New Delhi, Aug 13
The Federation of Indian Micro and Small & Medium Enterprises on Thursday urged Finance Ministry and GST Council to introduce legislative safeguards to protect bona fide taxpayers following the Supreme Court's recent judgment that made supplier tax payment mandatory for Input Tax Credit.
The SC had upheld Section 16(2)(c) of the CGST Act, which permits denial of Input Tax Credit (ITC) where a supplier has failed to deposit tax.
The ruling made relief for bona fide taxpayers in case of supplier default, largely dependent on legislative and administrative reforms rather than judicial interpretation. The industry body emphasised the need for legislative action to ensure honest taxpayers are not penalised for supplier defaults beyond their control.
FISME called for a statutory Safe Harbour for bona fide taxpayers that ensures ITC to businesses with valid tax invoices, proof of receipt of goods or services, and banking-channel payments.
In case of supplier defaults, recovery should be pursued against the defaulting supplier, the industry body said.
FISME also sought a time-bound GST refund mechanism, including automatic payment of interest on delayed refunds, to prevent working capital from being locked up, particularly for MSMEs and exporters.
It also recommended simplifying GST compliance through faster implementation of the One PAN-One Administration framework to enable more centralised compliance and reduce duplication across registrations.
FISME stressed predictable technology rollouts with adequate transition periods and sandbox testing before major system changes, mandatory pre-notice reconciliation, faceless adjudication, and measures to reduce avoidable litigation.
"Our recommendations do not seek any relaxation in tax obligations. They aim to reduce compliance costs, improve certainty, unlock working capital, strengthen voluntary compliance and make GST administration more efficient, transparent and taxpayer-friendly," said Anil Bhardwaj, Secretary General, FISME.
As India's indirect tax regime GST enters its tenth year of implementation, the number of registered GST taxpayers has grown from 66.5 lakh in 2017 to over 1.65 crore as of May 2026.
The widening taxpayer base indicates the growing formalisation of India's economy.
Gross GST collections have also risen from Rs 7.4 lakh crore in 2017-18 to over Rs 22.27 lakh crore in FY26, while July 2026 collections stood at Rs 2.11 lakh crore, up 15.4 per cent year-on-year.
Meanwhile, MSMEs continue to remain the backbone of the Indian economy, contributing 31.1 per cent of GDP, 48.58 per cent of exports and 35.4 per cent of manufacturing output.
— IANS
Reader Comments
Interesting perspective. In the US, we have a similar concept where the burden of tax collection falls on the supplier, but there are more protections for the buyer. India's GST regime has grown impressively though - the numbers speak for themselves. 1.65 crore registered taxpayers and collections growing 15% YoY. But this ITC issue needs resolution, especially for MSMEs which are the backbone of any economy.
The point about One PAN-One Administration is so relevant! As a CA dealing with multiple state registrations for clients, the duplication is a nightmare. We file 10 returns for one company across states, each with different compliance timelines. Faster implementation of this framework would reduce compliance costs significantly. But I'm skeptical about how quickly the government will act on these recommendations - we've been hearing about reforms for years.
I think the bigger issue here is trust in the system. When you have 1.65 crore taxpayers and the government is collecting ₹2.11 lakh crore monthly, it shows the system works. But penalizing honest businesses for supplier defaults creates a climate of distrust. The time-bound refund mechanism with automatic interest is absolutely essential - my company regularly waits 6-8 months for refunds. That's working capital we could have used for expansion.
I understand the concern, but also see the government's side. If we allow ITC without checking supplier compliance, it's easy to create fake invoices and claim false credits. The problem is that genuine businesses get caught in the crossfire. FISME's suggestion about banking-channel payment proof as a safe harbour condition makes sense though. At least it shows bonafide intent. The government should look at this pragmatically rather than taking a blanket approach.
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.