Division bench of Sikkim HC sets aside the order of single judge bench and holds refund of unutilized ITC is not available on closure of business

This Tax Alert summarizes a recent ruling of the division bench of the Sikkim High Court (HC) on refund of unutilized input tax credit (ITC) upon closure of business under the Central Goods and Services Tax Act, 2017 (CGST Act).

Earlier, the single judge bench of the Sikkim HC had allowed refund of unutilized ITC on closure of business. The Revenue challenged this ruling, and the matter came before the division bench.

Key observations of the division bench

• The Supreme Court (SC) in VKC Footsteps held that Parliament has the authority to determine the circumstances under which refund of ITC is permitted.

• Section 49(6) of the CGST Act provides for refund of balances in the electronic cash or credit ledger only in the manner laid down under Section 54.

• Section 54(3) specifically limits refund of ITC to two cases—zero-rated supplies and inverted duty structure. Closure of business is not covered.

• Allowing refund on closure of business would amount to judicial re-writing of Section 54(3), which is impermissible.

Accordingly, the division bench set aside the single judge’s order and held that refund of unutilized ITC is not available on closure of business.

Comments

• There have been conflicting rulings under the pre-GST regime on refund of accumulated credit upon business closure. The issue is now pending before the SC [SLP(C) No. 7390/2020].

• Even if the SC allows such refunds under the earlier regime, applicability under GST will need careful evaluation, since Section 54(3) expressly restricts refund scenarios.

• Industry may consider representing to the Government for allowing refund of balance ITC at the time of business discontinuation.

• Taxpayers who received refunds based on the single judge’s order may need to assess the possibility of repayment in light of this ruling.

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