In early June 2026, the GST authority issued guidance following adjudication orders against traders (notably M/s Sunrise Traders) who claimed input tax credit (ITC) on invoices from suppliers whose GSTIN registrations had been cancelled, suspended or show as 'inactive' on the GSTN portal.
The department's position is now clear: you cannot claim credit on invoices from a cancelled supplier, regardless of when the invoice was issued or when the supplier's status changed. This is not a new rule—it sits in Section 16(2)(a) of the CGST Act—but GSTN's automated cross-checks have made enforcement teeth real. Businesses are now receiving demand notices with interest (under Section 50 of the CGST Act) and penalties. A review of your active supplier base and invoice posting logs is overdue.
Market signals
GSTN's ledger-posting system now validates supplier GSTIN status at the moment you claim ITC—not just at audit. If your supplier's registration was cancelled before, during or after you posted the invoice, the system flags the transaction. An invoice issued on 15 May 2026 from a supplier whose GSTIN was cancelled on 20 May 2026 will block your ITC claim retroactively. The demand notice typically cites Section 16(2)(a) of the CGST Act and demands the credit amount plus interest at 18% per annum (or the applicable rate) from the date of original claim. Penalties under Section 122 (up to ₹50,000 per invoice in cases of suppression) are assessed separately.
A supplier's GSTIN can move to 'Cancelled', 'Suspended', 'Inactive', or 'Expired' status on the GSTN dashboard. The department's guidance (following Sunrise Traders and allied cases in May–June 2026) treats all non-'Active' statuses as ineligible for ITC purposes. Cancelled typically means the supplier voluntarily surrendered or was de-registered by the department; suspended usually follows non-filing of returns or non-payment of tax; inactive means no turnover reported for two consecutive quarters. Your finance team cannot distinguish these manually—you must check supplier GSTIN status quarterly on the GSTN portal (https://www.gstn.org) using the Taxpayer Search tool. If a supplier moves to cancelled/inactive status, any ITC claimed on invoices from that supplier after the status change date is at risk.
When a demand notice arrives, you have 30 days to respond (under Rule 142 of the CGST Rules, 2017). Many businesses miss this window and automatic interest accrues at the applicable GST rate (18% for most goods and services) from the date you originally claimed the credit. The reversal itself is mechanical: you must file an amended return (Form GSTR-1 or GSTR-3B, depending on when the invoice was originally filed) or issue a debit note to your buyer, reducing your ITC by the full invoice amount. If your supplier was your direct vendor and you purchased goods for resale or production, the loss of ITC increases your effective cost by the full GST amount—material for low-margin categories like textiles, food, or components.
This is not a niche compliance event—it touches every manufacturer and trader with a supplier base. The June 2026 guidance clarified the department's enforcement posture: GSTN will auto-flag mismatches
Frequently asked questions
ITC cannot be claimed on invoices from suppliers whose GSTIN registration is cancelled, suspended, or inactive on the GSTN portal, as per Section 16(2)(a) of the CGST Act. GSTN now validates supplier status in real-time when ITC is posted.
Businesses face demand notices with interest at 18% per annum from the date of original claim, plus penalties under Section 122 of up to ₹50,000 per invoice in suppression cases.
Review your active supplier base and invoice posting logs against current GSTN portal status for each supplier's GSTIN before claiming ITC. Check for cancelled, suspended, inactive, or expired registrations retroactively.