Introduction
As we all know GST is indirect tax system in India which facilitates input tax credit with a view to avoid cascading of taxes for registered businesses, as tax is ultimately borne by the end consumer. However, I was reading an amazing case law where the complication arose when a business ceased to operate but held a good amount of unutilized ITC in its electronic credit ledger.
In this article I will discuss, whether such unutilised credit can be refunded? As GST law don’t permit the same? Hence there is an amazing landmark judgment by the Hon’ble High Court of Sikkim in the case of SICPA India Pvt. Ltd. v. Union of India [2024 SCC OnLine Sikk 12] which have recently clarified this issue in detail.
What is the case all about?
SICPA India Pvt. Ltd., which is a registered taxpayer under GST, had ceased its operations in the state of Sikkim, as we know GST requires state based registeration and credit of one state can’t be setoff against that of other state, hence post-closure of operations, the company applied for a refund of unutilized ITC amounting to approximately ₹4.37 crore, which was reflected in the electronic credit ledger of the company in it’s GST portal. The refund claim was submitted under Section 54 of the central goods and services tax act, 2017 or CGST Act.
But in that case, the GST authorities rejected it’s claim, they argued that Section 54(3) of the CGST act permits refund of ITC only in cases of zero-rated supplies i.e. exports and supplies to SEZ or an inverted duty structure where the tax rate on inputs is higher than the tax rate on output supplies. The authorities asserted that closure of business is not a valid ground for ITC refund under the current CGST act, 2017.
SICPA refused to accept this rejection and approached the Hon’ble High Court of Sikkim as per the Article 226 of the Constitution, invoking the Court’s writ jurisdiction.
Now before we move forward with this article, let’s discuss few of the governing sections and legal provisions of GST act
First is Section 49(6) of the CGST Act:
“The balance in the electronic credit ledger may be refunded in accordance with the provisions of section 54.”
This section establishes the eligibility of a taxpayer to seek a refund of the input tax credit balance, being reflected in credit ledger subject to Section 54.
Now what does this section 54(3) of the CGST Act says?
“Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilized input tax credit at the end of any tax period”
There is a proviso stating that no refund of unutilized input tax credit shall be allowed in cases other than, zero-rated supplies made without payment of tax or where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (inverted duty structure)
In above case, The GST department rejected their appeal solely on the restrictions stated in Section 54(3) of the act.
observations and interpretation of High Court
The Hon’ble High Court of Sikkim carefully analysed the legal aspect of the case, The Court noted that there is no express prohibition in the CGST act against the refund of ITC in the event of closure or caseation of business. In this case, Section 54(3) limits the scenarios in which unutilized ITC may be refunded, this must be read in harmony with Section 49(6). Hence, in that case Section 54(1) allows refund of “any tax and interest, if any, paid by him or any other amount paid by him”, which is not confined to Section 54(3) alone.
The Court emphasized a basic principle of constitutional GST act, which states that, “the State cannot retain tax without the authority of law” as stated in the case of CCE v. Hindustan Zinc Ltd., (2015) 5 SCC 101.
It further stated that, in case the ITC remains in the input tax credit ledger of a taxpayer who has ceased operations, and there is no scope of any future utilization of credit, then retaining such credit would be unjust and unconstitutional.
Judgment and outcome
In light of above reasoning, by declaring it “unjust and unconstitutional” the Hon’ble High Court quashed the rejection orders of the GST authorities and directed them to process and grant the refund of ₹4.37 crore to SICPA India Private Ltd.
This judgment of High court highlights that a purposive and harmonious interpretation of the GST law is essential, which means the main purpose of ITC is to prevent tax-on-tax and it was not introduced to create unnecessary financial burden on businesses, especially those that have shut down dueto any reasons.
Implications of this judgment
This judgment sets a significant precedent for the businesses that have closed operations but are unable to utilize the accumulated ITC dueto section 54 of the act, hence it recognizes the taxpayer’s right to receive a refund in such cases, promoting equity.
Though this decision brings relief to the petitioner, it may lead to appeals and counter-litigation in Supreme court, as in law it is not the case where refund can be taken, hence to seek clarity and uniformity the government might challenge the decision before the Hon’ble Supreme Court.
On the other hand, the government might consider amending the CGST Act to either explicitly permit or bar such refunds in cases of business closure, this amendment may help taxpayers to eliminate ambiguity and standardize practice across all the jurisdictions.
Even the GST officers at ground level may require guidance or circulars from the Central Board of Indirect Taxes and Customs to ensure consistent implementation of the principles laid down in this unique judgment by the HC.
What is situations in case of VAT or across the globe?
Globally speaking, the indirect tax regimes like VAT or GST mostly allows taxpayer to claim for refund of input tax credits when the business ceases, with a condition that compliance requirements should be fulfilled. Hence jurisdictions that of Australia, Canada, and the European Union provide the mechanisms for refunding excess credits in such cases as per the OECD International VAT/GST Guidelines, 2017.
The Indian GST system is even though modelled on global best practices but has certain rigidities that must evolve through legislative or judicial means.
As a professional, I usually go through many case laws, my main take on this type of case laws whether for purchaser getting his ITC denied dueto supplier’s mistake or this case law as I discussed above, I saw that one must maintain clear documentation and proof of transitions or business closure, ensuring that the refund application is correctly filed under the appropriate section and in case the refund is denied, one must evaluate the option of approaching the High Court and may challenge it as per the Article 226 of constitution.
We being professionals, must stay updated on further developments or changes in the CGST Act, especially any amendments resulting from this judgment.
Conclusion
The High Court of Sikkim has reaffirmed an important constitutional principle, stating tax cannot be retained without legal justification. While Section 54(3) of the CGST act prescribes conditions for refund of ITC, it does not categorically prohibit refunds in case of business closure.
This judgment opens the door for genuine businesses to recover their locked-in credit post-closure, reinforcing the fair and equitable foundation of the GST regime. However, until the Supreme Court decides the matter or the law is amended, caution must be exercised. Businesses should ensure that claims are substantiated, and compliance norms are diligently followed.
For now, this ruling marks a crucial step toward interpreting GST provisions in a practical, business-friendly, and constitutionally sound manner.
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Author may be contacted at aman.rajput@mail.ca.in
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