In a significant ruling with far-reaching policy implications, the Sikkim High Court has allowed the refund claim of accumulated input tax credit (ITC) upon the closure of a business. This decision addresses a critical gap in the current goods and services tax (GST) legislation, as the law does not explicitly specify business closure as a reason for allowing such refunds.

Justice Meenakshi Madan Rai, in a ruling pronounced on Tuesday, emphasised, “Section 54(3) of the CGST Act deals only with two circumstances where refunds can be made; however, the statute also does not provide for retention of tax without the authority of law. Consequently, I am of the considered view that the petitioners are entitled to the refund of unutilised ITC claimed by them and it is ordered so.”

The existing Section 54(3) of the CGST Act permits ITC refunds only in two specific scenarios — One, zero-rated supplies made without payment of tax and two, where credit has accumulated due to the rate of tax on inputs being higher than the rate on output supplies (excluding nil-rated or fully exempt supplies), except when notified by the government.

The petitioner, SICPA India Private Ltd, had accumulated over ₹4.37 crore in unutilised ITC due to the closure of its manufacturing unit in Sikkim and claimed refund of the unutilised ITC balance. However, its appeal was rejected by the Tax Administration as CGST Act permits refund of accumulated ITC only in specific cases. Refund of ITC balance upon business closure is not covered under Section 54(3). Aggrieved by the rejection, the company approached the High Court.

The Court relied on principles from the erstwhile indirect tax regime like the Karnataka High Court’s decision in M/s Slovak India on CENVAT Credit Rules and it observes that there is no restriction expressed in Sections 49(6) or 54 of the CGST Act that bars refund of accumulated ITC on business closure and accordingly allowed the appeal. It is expected now that the Revenue Department will move the higher court in appeal.

Commenting on the ruling, Harpreet Singh, Partner, Indirect tax at Deloitte said: “The above decision is a first-of-its-kind under the GST regime, where the Court referred to Section 49(6) of the CGST Act and jurisprudence from the erstwhile regime to allow refund of accumulated ITC on account of business closure. This sets an important precedent for entities winding up operations with unutilised ITC.”

Published on June 11, 2025