GST Input Tax Credit Reversal When a Vendor Undergoes Liquidation

Vikrant D. Shetty

Oct 1

13 min read

Updated: Oct 21

GST Input Tax Credit Reversal When a Vendor Undergoes Liquidation: A Practical Guide for Finance and Legal Teams

A recipient must reverse input tax credit on a defaulting vendor's invoices once the vendor breaches Section 16(2) of the Central Goods and Services Tax Act, 2017: that the invoice appears in Form GSTR-2B under clause (aa), and that the tax charged has reached the government under clause (c). A vendor sliding toward insolvency typically breaches both in sequence, lapsing first on Form GSTR-3B while still filing Form GSTR-1, then ceasing to file altogether. Two reversal clocks then apply, one from the recipient's payment delay past one hundred eighty days, the other from Rule 37A's September deadline. This article maps both clocks and what changes once the vendor enters CIRP.

The Two Conditions in Section 16 That a Failing Vendor Breaks

Section 16(1) of the CGST Act confers the entitlement to input tax credit. Section 16(2) opens with a non obstante clause and lists the conditions that must all be satisfied before the entitlement can be exercised: possession of a tax invoice or debit note, receipt of the goods or services, communication of the invoice details by the supplier, actual payment of the tax to the Government, and furnishing of the return under section 39. Three of those sit within the recipient's control. Two depend entirely on the conduct of a counterparty whose finance function is by then in disarray.

Clause (aa) and the Shift From the Purchase Register to GSTR-2B

Clause (aa) was inserted into section 16(2) by the Finance Act, 2021 and brought into force on 1 January 2022 by Notification No. 39/2021-Central Tax. It denies credit unless the details of the invoice have been furnished by the supplier in its statement of outward supplies and communicated to the recipient. Rule 36(4) of the Central Goods and Services Tax Rules, 2017 (the CGST Rules) was substituted with effect from the same date, so that credit is available only where the supplier has reported the invoice in Form GSTR-1 or through the invoice furnishing facility and it has reached the recipient in Form GSTR-2B. The provisional credit that rule 36(4) once permitted, capped successively at twenty, ten and five per cent, no longer exists. GSTR-2B, a static monthly statement, now governs eligibility, while GSTR-2A survives as a reconciliation and evidentiary record rather than a source of entitlement.

Clause (c) and the Requirement That Tax Actually Reach the Government

Clause (c) requires that the tax charged in respect of the supply has actually been paid to the Government, whether in cash or through utilisation of admissible input tax credit. A vendor that keeps filing Form GSTR-1 while ceasing to file Form GSTR-3B satisfies clause (aa) and fails clause (c). That combination is not accidental. Reporting outward supply costs nothing and keeps customers from asking questions; paying the tax costs cash a distressed company does not have. The invoice therefore appears in the recipient's GSTR-2B, credit is taken in the ordinary course, and the defect surfaces only when the department runs a comparison or when the reversal machinery is triggered.

Two Reversal Clocks, Running Together

One clock is triggered by the recipient's own payment behaviour and the other by the vendor's filing default. In a vendor failure they usually start within months of each other, and they are administered by different teams inside the same company.

The Hundred and Eighty Day Clock in the Second Proviso to Section 16(2)

The second proviso to section 16(2) provides that where a recipient fails to pay the supplier the value of the supply along with the tax within one hundred and eighty days from the date of issue of the invoice, an amount equal to the credit availed becomes payable with interest under section 50. Rule 37, as substituted with effect from 1 October 2022 by Notification No. 26/2022-Central Tax, requires that reversal in the return for the tax period immediately following expiry of the period and confines it to the proportionate credit attributable to the unpaid amount. The third proviso restores the credit once payment is made.

This is where sound commercial instinct produces a tax loss. When a vendor stops performing, the reflex is to stop paying: legal advises set-off against damages, treasury places a hold on the payment run, and indirect tax is told nothing. The clock runs from the invoice date, not from the date of the dispute, and it is indifferent to whether the withholding was justified. A recipient can be entirely right about the commercial position and still owe interest on reversed credit.

Rule 37A and the Thirtieth of September

Rule 37A, inserted with effect from 26 December 2022, addresses the failing vendor directly. Where the supplier has furnished its statement of outward supplies but has not furnished the return in Form GSTR-3B for that period by 30 September following the end of the financial year in which the credit was availed, the recipient must reverse the credit in a return filed on or before 30 November of that year, failing which the amount is payable with interest. If the supplier later furnishes the return, the recipient may re-avail the credit in any subsequent return.

The rule converts clause (c) from a ground of challenge available to an officer into a self-assessment obligation on the recipient, with a fixed date and no adjudication in front of it. For a vendor admitted to insolvency mid-year the arithmetic is unforgiving, because returns for the pre-admission period will not be filed by a suspended management and the insolvency professional is under no obligation to file them under the old registration.

Where the Recipient Stands: A Scenario Map

The table below maps the situations that recur when a supplier fails, distinguishing credit that was never available from credit that was validly taken and must now be given back.

Scenario	Effect on the recipient's credit	Statutory basis	Action
Invoice never reported by the vendor and absent from GSTR-2B	Credit not available at all; availment is irregular from the outset	Section 16(2)(aa) read with rule 36(4)	Keep it out of the return; press the vendor or the professional to file
Invoice in GSTR-2B but the vendor never filed GSTR-3B for that period	Validly availed but reversible if the return is not filed by 30 September following the financial year	Rule 37A	Reverse by 30 November; re-avail if the vendor later files
Payment withheld beyond 180 days because the vendor stopped performing	Proportionate reversal of credit on the unpaid value, with interest	Second proviso to section 16(2) read with rule 37	Reverse in the next return; re-avail on payment under the third proviso
Vendor filed and paid; the demand rests on a 2A versus 3B mismatch	Credit sustainable; the dispute is evidentiary rather than legal	Section 16(2)(c); Circulars 183/15/2022-GST and 193/05/2023-GST for periods up to December 2021	Produce invoice, e-way bill, transport records, bank proof and the prescribed certificate
Vendor admitted to CIRP and the professional takes a fresh registration	Credit on post-appointment supplies must run through the new GSTIN	Notification No. 11/2020-Central Tax under section 148; Circular 134/04/2020-GST	Update vendor master data; hold payment runs until the new GSTIN is confirmed
Vendor's resolution plan approved and pre-CIRP dues extinguished	No relief for the recipient; the demand rests on its own return	Section 31(6) of the Code; section 16(2)(c)	Contest on clause (c); do not treat plan approval as a cure
Vendor in liquidation, registration cancelled, no assets	Highest exposure; the exceptional circumstances carve-out works against the recipient	Section 16(2)(c)	File a proof of claim; fall back on contractual indemnity and documentation

Does a Bona Fide Recipient Bear the Vendor's Default?

The objection to clause (c) is easy to state. The recipient has paid the tax to its supplier, has no statutory means of compelling remittance, and cannot verify remittance independently. Denying credit in those circumstances taxes the same supply twice and shifts the cost of a collection failure onto a private party. The High Courts have not agreed on the answer, and no advice should proceed on the footing that either line is settled.

Calcutta: The Duty to Pursue the Supplier First

In Suncraft Energy Private Limited v. Assistant Commissioner, State Tax, Ballygunge Charge [MAT 1218 of 2023, decided on 2 August 2023], a Division Bench of the Calcutta High Court set aside a demand requiring the recipient to reverse credit because the invoices were not reflected in its Form GSTR-2A, in circumstances where the recipient held the invoices, had received the supply and had paid the supplier including tax. The authority, the Court held, should first proceed against the defaulting supplier, and may turn to the recipient only in exceptional situations such as collusion between the two, or a supplier that has gone missing, closed its business or has no assets. The department's special leave petition was dismissed, although a dismissal in limine disposes of the parties' dispute without laying down law under Article 141 of the Constitution.

Patna: Credit as a Statutory Concession

Sixteen days later, in M/s Aastha Enterprises v. State of Bihar [Civil Writ Jurisdiction Case No. 10395 of 2023, decided on 18 August 2023], the Patna High Court took the opposite view. Input tax credit, it held, is a benefit conferred by statute rather than a right, and is available only when every condition attached to it is satisfied. Proof of a genuine purchase, movement of goods and payment through banking channels does not dispense with clause (c). A purchaser who has paid tax to a seller that did not remit it has a remedy against that seller in contract or in a civil suit, but not against the exchequer.

The two decisions cannot be reconciled on their reasoning, and the Supreme Court has not resolved the conflict on the merits. What follows for an in-house team is procedural rather than doctrinal. Both lines punish a thin evidentiary record, and both reward a recipient able to produce the invoice, the e-way bill, transport and delivery documentation, proof of payment through banking channels and the GSTR-2B extract for the relevant month. For periods up to December 2021, Circular No. 183/15/2022-GST dated 27 December 2022, extended by Circular No. 193/05/2023-GST, permits a mismatch to be regularised through a certificate from the supplier, or from a chartered accountant or cost accountant where the difference exceeds five lakh rupees. That certificate is obtainable while a vendor is merely late and unobtainable once an insolvency professional is in control.

What Changes When the Vendor Enters CIRP or Liquidation

Notification No. 11/2020-Central Tax dated 21 March 2020, issued under section 148 of the CGST Act and amended by Notification No. 39/2020-Central Tax dated 5 May 2020, notifies corporate debtors undergoing the corporate insolvency resolution process (CIRP) whose management vests in an interim resolution professional or resolution professional as a class of persons required to follow a special procedure. Such a corporate debtor is treated as a distinct person and a fresh registration must be obtained in each State or Union territory where it was registered, within thirty days of the appointment. The amendment confined the requirement to corporate debtors that had defaulted in furnishing returns under section 39 before the appointment, so a debtor whose filings were current continues on its existing registration. Circular No. 134/04/2020-GST dated 23 March 2020 sets out the mechanics.

Why Does a Fresh GSTIN Create a Vendor Master Problem?

For accounts payable the operational point is narrow and expensive to miss. Once the changeover happens, invoices for post-appointment supplies should carry the new GSTIN, and credit claimed against the old registration for those supplies will not survive scrutiny. Vendor master data has to be corrected as soon as the appointment is notified, payment runs held until the new particulars and the corresponding GSTR-2B entries are confirmed, and any invoice issued in the interim under the old number reissued.

Does the Vendor's Section 31(6) Clean Slate Protect the Recipient?

Circular No. 134/04/2020-GST treats GST dues of the pre-CIRP period as operational debt to be claimed before the National Company Law Tribunal, and directs that no coercive action be taken against the corporate debtor in respect of them. Section 31(6) of the Insolvency and Bankruptcy Code, 2016 (the Code), inserted by the Insolvency and Bankruptcy Code (Amendment) Act, 2026 and in force from 26 May 2026, now codifies the clean slate principle: on approval of a resolution plan, all prior claims against the corporate debtor and its assets stand extinguished.

That extinguishment operates in favour of the corporate debtor. It does not reach a demand raised on the recipient, which rests on the recipient's own failure to satisfy clause (c) and not on any claim against the vendor. The effect is worse than neutral: once the vendor's pre-CIRP liability is extinguished the department cannot recover from the supplier at all, which places the recipient squarely inside the exceptional circumstances carve-out that Calcutta itself recognised. Where the vendor proceeds to liquidation instead, a claim for the tax component ranks as an operational creditor claim under section 53 of the Code, below the costs of the process, workmen's dues and secured creditors, which in most estates means nothing.

The durable answer sits in the vendor contract rather than in the litigation. A tax compliance covenant requiring reporting in the correct month, an indemnity for credit denied through the supplier's default, a right to withhold the tax component until the invoice appears in GSTR-2B, and a set-off right expressed to survive insolvency are all standard and all easier to negotiate at onboarding than at renewal. The withholding right needs to be drafted against the second proviso, so that the tax component is released once the credit is visible rather than left outstanding past the hundred and eightieth day.

Frequently Asked Questions

Can credit be denied only because the invoice is missing from GSTR-2B?

Yes. Since 1 January 2022, clause (aa) of section 16(2) read with rule 36(4) makes communication of the invoice through Form GSTR-2B a condition of eligibility. If the invoice is absent, the credit is not available for that period, and you should keep it out of the return rather than take it and reverse later.

Does withholding payment from a defaulting vendor protect your position?

Not for tax purposes. The second proviso to section 16(2) and rule 37 require proportionate reversal with interest where the supplier is not paid within one hundred and eighty days of the invoice date, whatever the reason for withholding. Track that date on every disputed invoice and reverse before it passes.

If the vendor eventually files its return, can reversed credit be recovered?

Yes. Rule 37A allows re-availment in any subsequent return once the supplier furnishes the pending Form GSTR-3B, and the third proviso to section 16(2) restores credit reversed for non-payment once the supplier is paid. Neither route is caught by the time limit in section 16(4).

Does the moratorium under section 14 of the Code stop a demand against you?

No. The moratorium protects the corporate debtor. A notice requiring you to reverse credit is a proceeding against you on your own return, and it can be issued and adjudicated while the vendor's insolvency runs. The vendor's admission is context, not a defence.

Should a claim be filed in the vendor's insolvency for the tax component?

Yes, where a contractual indemnity or an unadjusted advance supports it. File as an operational creditor within the timeline in the public announcement. Recovery is usually poor, but an unfiled claim is extinguished on plan approval under section 31(6) of the Code and cannot be revived afterwards.

What should be preserved before the vendor disappears?

Tax invoices, e-way bills, transport and delivery records, proof of payment through banking channels, GSTR-2B extracts, and any supplier or auditor certificate available for periods up to December 2021. Correspondence with the vendor's finance team about its filings is worth retaining as well.

What is the difference between clause (aa) and clause (c) of Section 16(2) for a failing vendor?

Clause (aa) denies credit unless the supplier has reported the invoice in its statement of outward supplies so that it reaches the recipient's Form GSTR-2B, a reporting test that a vendor can satisfy simply by filing Form GSTR-1. Clause (c) goes further and requires that the tax charged has actually been paid to the government, a payment test that a vendor breaches the moment it stops filing Form GSTR-3B even while continuing to file Form GSTR-1. A recipient can therefore lose credit under clause (c) despite the invoice appearing correctly in GSTR-2B.

When did Rule 37A come into effect and what does it require the recipient to do?

Rule 37A took effect on 26 December 2022 and applies where a supplier has filed its statement of outward supplies but has not filed Form GSTR-3B for that period by the thirtieth of September following the end of the financial year. Once that date passes, the recipient must reverse, by its own return for November of the following year, the credit attributable to that unpaid invoice, without waiting for a departmental notice or an adjudication order.

Can a recipient re-avail credit after reversing it under Rule 37A?

Yes. Rule 37A allows the recipient to re-avail the reversed credit if the defaulting supplier subsequently files the pending Form GSTR-3B and pays the tax, but only in the return period during which the supplier actually files, and the recipient bears the burden of tracking the supplier's compliance to claim the re-availment in time. There is no automatic restoration; the recipient must act on its own return once the supplier's default is cured.

How do the Calcutta and Patna High Courts differ on a bona fide recipient's liability?

In Suncraft Energy Private Limited v. Assistant Commissioner, State Tax, Ballygunge Charge (MAT 1218 of 2023, decided on 2 August 2023), the Calcutta High Court set aside a demand on the recipient without first requiring the department to pursue the defaulting supplier. Sixteen days later, in M/s Aastha Enterprises v. State of Bihar (Civil Writ Jurisdiction Case No. 10395 of 2023, decided on 18 August 2023), the Patna High Court held that input tax credit is a statutory concession rather than a vested right, and upheld a demand on the recipient regardless of the supplier's default. The Supreme Court has not resolved the conflict on merits.

What happens to input tax credit already taken against a vendor's old GSTIN after CIRP begins?

Notification No. 11/2020-Central Tax, issued under section 148 of the Central Goods and Services Tax Act, 2017, and amended by Notification No. 39/2020-Central Tax, requires a corporate debtor undergoing the corporate insolvency resolution process to obtain a fresh GSTIN. Invoices for supplies made after the appointment of the interim resolution professional must carry the new GSTIN, and credit claimed by the recipient against the old registration for post-appointment supplies will not survive scrutiny.

Does interest apply when a recipient reverses credit under the 180-day non-payment rule?

Yes. Section 50 of the Central Goods and Services Tax Act, 2017, treats the reversal under the second proviso to Section 16(2) as an addition to output tax liability carrying interest, calculated from the date the credit was originally availed until the date the reversed amount is paid, not merely from the expiry of the one hundred and eighty days. Once the recipient pays the vendor and the tax component in full, the credit can be reclaimed, but the interest already paid for the intervening period is not refunded.

What contractual protection can a business build in before a vendor becomes insolvent?

A tax compliance covenant requiring the vendor to report supplies in the correct return period, an indemnity for any credit denied because of the vendor's filing default, and a contractual right to withhold the tax component of an invoice until the vendor's GSTR-3B filing is confirmed are the three protections that make the most practical difference. Building these into the vendor contract before signs of distress appear is far more effective than negotiating them once a vendor has already started missing filings.

Is the recipient's own accounts payable team usually the first to notice a vendor's GST default?

Rarely, because accounts payable typically tracks whether an invoice was received and approved, not whether the vendor's GSTR-3B was filed for that period, so the tax function usually detects the default first through GSTR-2B reconciliation. Coordinating the finance, legal, and tax teams so that a payment hold placed for commercial reasons is communicated to the indirect tax team is essential, since withholding payment for a legitimate business dispute does not by itself protect the input tax credit position.