India’s Goods and Services Tax (“GST”) regime was conceived as a seamless value-added tax system, eliminating the cascading of taxes. A central feature of this design is input tax credit (“ITC”), a statutory entitlement, not a discretionary concession, available upon compliance with the prescribed conditions.
But what happens when a business permanently shuts down? The ITC lying in the Electronic Credit Ledger risks becoming stranded capital unless the law allows it to be refunded. The controversy arises because Section 54(3) of the Central Goods and Services Tax Act, 2017 (“CGST Act”) restricts refunds to two specific cases, omitting closure of business. Revenue authorities have treated this omission as a complete bar.
The High Court of Sikkim, in SICPA India Private Limited & Anr. v. Union of India & Ors., WP(C) No. 54 of 2023, broke from this orthodoxy. It held that in the absence of an express statutory prohibition, retaining such ITC violates Article 265 of the Constitution. This commentary examines the statutory background, the Court’s reasoning, and the implications for taxpayers.
Statutory Setting and Legislative Background
The entitlement to ITC flows from Section 16(1) of the CGST Act-
“Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services… used or intended to be used in the course or furtherance of his business…”
Once the statutory conditions, such as possession of a valid tax invoice, receipt of goods or services, payment of tax to the Government, and filing of returns, are met, the credit vests in the taxpayer and appears in the Electronic Credit Ledger.
Section 49(6) then provides-
“The balance in the electronic cash ledger or electronic credit ledger after payment of tax, interest, penalty, fee or any other amount payable under this Act or the rules made thereunder may be refunded in such manner as may be prescribed.”
This clause is broad; it does not confine refunds to specific events. Taxpayers argue it is a substantive enabling provision.
Section 54(3), however, states-
“A registered person may claim refund of any unutilised input tax credit at the end of any tax period-
Provided that no refund of unutilised input tax credit shall be allowed in cases other than-
(i) zero rated supplies made without payment of tax;
(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies…”
Closure of business does not feature here, and revenue authorities have long treated this list as exhaustive.
Procedurally, Rule 89 of the CGST Rules, 2017 governs refund claims. It applies to both cash and credit ledger balances and does not itself restrict refund scenarios, making it capable of accommodating claims under Section 49(6).
The constitutional backstop is Article 265 of the Constitution-
“No tax shall be levied or collected except by authority of law.”
This provision ensures that the State cannot retain money without statutory sanction.
The pre-GST position
Under the CENVAT Credit Rules, 2004, Rule 5 allowed refunds only for exports and inverted duty structure. There was no provision for closure-of-business refunds.
In Slovak India Trading Co. Pvt. Ltd. v. CCE (2006), the Karnataka High Court allowed refund of unutilised CENVAT credit on closure, treating the credit as a vested right and refusing to let it lapse absent statutory authority. The Supreme Court dismissed the Department’s appeal in 2010.
Other High Courts, such as the Madras High Court, adopted a restrictive view, denying closure refunds without express provision.
When GST was introduced, Parliament largely replicated the restrictive CENVAT model in Section 54(3) but added Section 49(6), a provision absents from the earlier regime. However, it gave no express guidance on closure refunds, leaving room for interpretative disputes.
The SICPA Case and the Court’s Reasoning
SICPA India Private Limited, a manufacturer in Sikkim, accumulated ₹4.37 crore in validly availed ITC. Upon deciding to close operations in the State, it had no further output tax liability to adjust this credit. It applied for a refund under Section 49(6) via the Rule 89 procedure.
The Assistant Commissioner rejected the application, stating that Section 54(3) permits refunds only in the two specified cases. The Appellate Authority upheld the rejection.
SICPA approached the High Court with two principal arguments–
1.Section 49(6) is a substantive right allowing refund of ledger balances after liabilities are cleared, independent of Section 54(3).
2. Retaining valid ITC without statutory basis breaches Article 265.
Revenue’s stance– Section 49(6) is procedural and must be read subject to Section 54(3).
The court held the following-
1.Section 54(3) does not include closure as a refund ground, but there is no clause expressly prohibiting it.
2. The Court held it operates as a substantive enabling provision, capable of standing alone. Section 54(3) covers specific recurring situations; Section 49(6) deals generally with surplus ledger balances.
3. Invoking Article 265, the Court stated that once ITC accrues validly, it is the taxpayer’s property and cannot be retained without statutory forfeiture authority.
4. Both provisions must be given effect; one cannot be read to nullify the plain language of the other.
5. The case raised pure questions of law; writ jurisdiction was appropriate despite alternate remedies.
The Court directed refund of the unutilised ITC.
Implications, Risks, and Legislative Pathways
1.By treating Section 49(6) as an independent gateway, SICPA opens the door to refunds beyond the two scenarios in Section 54(3). Closure is one example; sudden statutory changes or withdrawal of exemptions could be others.
2. The reliance on Article 265 elevates the matter from statutory interpretation to a constitutional guarantee, echoing Eicher Motors Ltd. v. Union of India (1999), where ITC was recognised as a vested right.
3. GST’s promise of seamless credit flow is undermined if credit lapses upon closure. This judgment realigns practice with policy.
4. Revenue fears of sham closures to encash ITC are genuine. Safeguards could include-
- Proof of GST deregistration;
- Evidence of cessation of operations;
- Verification of stock clearance;
- A cooling-off period before refund.
5. Jurisdictional limitations- The ruling is binding only in Sikkim. Elsewhere, claims may be denied, requiring litigation. Divergence is inevitable until resolved by the Supreme Court or Parliament.
6. Legislative clarity needed- Parliament could amend Section 54(3) to-
- Expressly include closure refunds with safeguards; or
- Explicitly bar them, avoiding uncertainty.
7. Practical taxpayer strategy- Businesses planning closure should-
- Maintain a detailed closure record;
- Frame claims under Section 49(6) using Rule 89;
- Prepare for litigation outside Sikkim;
- Avoid patterns suggesting ITC manipulation;
- Leverage SICPA in negotiations with the Department.
Conclusion
The SICPA decision is a significant departure from revenue orthodoxy. By affirming Section 49(6) as a substantive, independent provision and grounding its reasoning in Article 265, the Sikkim High Court has created a pathway for taxpayers to recover stranded ITC on closure of business.
Its reach is currently limited, but its reasoning is persuasive. The legislative choice is now clear- expressly permit closure refunds with safeguards, or explicitly exclude them. Until then, in at least one jurisdiction, legislative silence will not be allowed to defeat substantive rights.
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good commentary