Indian High Court Restricts 'Mechanical' Denial of Input Tax Credit for Buyer

The Indian High Court has ruled against the automatic denial of Input Tax Credit (ITC) to buyers when their suppliers default on tax payments. This landmark decision provides relief to businesses, asserting that buyers should not be penalized twice (paying the tax to the supplier and then being denied ITC) if they have genuinely paid for goods or services and the supplier's default is beyond their control. The court has issued 14 guidelines to prevent arbitrary ITC denials, emphasizing the need for tax authorities to pursue recovery from the defaulting supplier first. This ruling has significant implications for multinational corporations operating in India, as it reduces the risk of cash flow blockages and double taxation due to supplier non-compliance. It aligns India's GST framework more closely with international principles, particularly those in the EU, where robust mechanisms protect buyers from such scenarios. Companies will still need to demonstrate due diligence in their vendor selection and transaction processes but gain a stronger legal basis to claim legitimate ITCs.