The issue of refund of unutilized Input Tax Credit (ITC) under the Central Goods and Services Tax Act, 2017 (CGST Act) has been a matter of intense judicial scrutiny since the inception of the Goods and Services Tax regime. While ITC is designed to prevent cascading of taxes and ensure value-added taxation, questions have arisen regarding its refundability in circumstances not expressly provided under the Act. One such situation is the closure of a business.
The recent decision of the Sikkim High Court in Union of India & Ors. v. SICPA India Pvt. Ltd. (W.A. No. 02 of 2025, judgment dated 5th September 2025) squarely addressed this issue. The Court was asked to decide whether a refund of unutilized ITC can be granted upon business discontinuance under Sections 49(6) and 54 of the CGST Act.
Statutory Framework: Sections 49 and 54 of the CGST Act
Section 49: Payment of Tax and Ledgers
Section 49 deals with the manner of payment of tax, interest, penalty, fee, and other dues. Under Section 49(2), ITC as self-assessed is credited to the electronic credit ledger, while under Section 49(3), amounts in the electronic cash ledger may be used for payment of dues. Crucially, Section 49(6) 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 accordance with the provisions of Section 54.”
Thus, Section 49(6) is not an independent refund-granting provision but refers back to Section 54.
Section 54: Refund Provisions
Section 54 governs the refund of tax, interest, or any other amount paid. Sub-section (3) specifically deals with the refund of unutilized ITC. However, it allows a refund only in two limited situations:
- Zero-rated supplies are made without payment of tax.
- Accumulation due to an inverted duty structure, i.e., where the tax rate on inputs is higher than that on output supplies.
- Closure of business is not included within these two categories. This statutory exclusion lies at the heart of the controversy.
Facts of the SICPA Case
SICPA India Pvt. Ltd., engaged in manufacturing security inks, discontinued operations in Sikkim in 2019 following a lack of orders from its primary customer, the Reserve Bank of India. It sold its machinery and facilities between April 2019 and March 2020.
At the time of closure, SICPA had an accumulated unutilized ITC of approximately ₹4.37 crore in its electronic credit ledger. The company filed a refund claim under Section 49(6) read with Section 54, categorising it as “any other” in Form GST RFD-01, citing business discontinuance as the ground.
Both the Assistant Commissioner (08.02.2022) and the Appellate Authority (22.03.2023) rejected the claim, holding that closure of business is not a ground for refund under Section 54(3).
A Single Judge of the Sikkim High Court, however, allowed the refund, reasoning that there was “no express prohibition” against such refund under Sections 49(6) and 54, and that retention of ITC without refund would amount to retention of tax without authority of law.
The Union of India appealed before the Division Bench.
Submissions of the Parties
Appellants (Union of India)
- Relied on the Supreme Court judgment in Union of India v. VKC Footsteps (India) (P) Ltd. (2022) 2 SCC 603), which held that refund under Section 54(3) is confined strictly to the two situations enumerated.
- Cited the Tripura High Court ruling in Sterlite Power Transmission Ltd. v. Addl. Commissioner, CGST & CX, which rejected refund of accumulated ITC not covered by Section 54(3).
- Argued that the closure of a business falls under Section 29 (cancellation of registration), where accumulated ITC must be reversed under Section 29(5), not refunded.
- Contended that permitting refunds on closure would amount to judicial rewriting of Section 54(3).
Respondents (SICPA India Pvt. Ltd.)
- Argued that Section 49(6) itself provides for the refund of any balance in the electronic credit ledger.
- Distinguished VKC Footsteps by claiming it only dealt with inverted duty refunds and not the closure of business.
- Relied on Slovak India Trading Co. Pvt. Ltd. (Karnataka High Court, 2006), where refund of unutilized Cenvat credit was allowed on closure of unit.
- Asserted that retaining ITC on closure would be unconstitutional as it amounts to unjust enrichment of the State.
Judicial Analysis by the Division Bench
(1) Relationship between Sections 49(6) and 54
The Court held that Section 49(6) does not independently create a right to refund. The phrase “may be refunded in accordance with Section 54” means that any refund of balances in the ledgers must strictly comply with Section 54 provisions. Thus, closure of business is not a valid ground since it is not included in Section 54(3).
(2) Scope of Section 54(3)
Referring to VKC Footsteps, the Bench reiterated that:
- Refund is not a constitutional right but a statutory prescription.
- Parliament has deliberately confined refunds of unutilized ITC only to two categories.
- Expanding these to include closure of business would amount to judicial legislation, which is impermissible.
(3) Slovak India and Its Limited Applicability
The Court examined Slovak India and subsequent cases such as Jain Vanguard Polybutylene Ltd. (Bombay HC) and Gauri Plasticulture Pvt. Ltd. (Bombay HC, 2019). It concluded that Slovak India was based on CENVAT Rules, not the GST regime, and cannot be applied to the CGST Act interpretation. Moreover, later larger bench rulings rejected the idea of refunds on closure.
(4) Section 29(5): Reversal on Cancellation of Registration
The Bench highlighted Section 29(5), which mandates that upon cancellation of registration, a taxpayer must reverse the ITC equivalent to stock, semi-finished goods, finished goods, or capital goods. Hence, accumulated ITC is meant to be reversed, not refunded, upon closure.
(5) Constitutional Argument
The Court rejected the Single Judge’s view that non-refund amounts to unlawful retention of tax. ITC is not “tax paid” but a concession/credit mechanism. Accumulated ITC under closure is not outside statutory provisions; hence, there is no constitutional violation.
Key Findings of the Sikkim High Court
- Section 49(6) merely permits a refund subject to Section 54; it is not an independent source of refund.
- Section 54(3) restricts refunds of unutilized ITC only to two situations: zero-rated supplies without payment of tax and an inverted duty structure.
- Closure of business is not covered under Section 54(3).
- Section 29(5) mandates reversal of ITC upon cancellation of registration, leaving no scope for refund on closure.
- Precedents like Slovak India are distinguishable and not binding under the GST regime.
- Retention of accumulated ITC on closure does not violate constitutional provisions as refund is a statutory right, not a fundamental one.
The Court thus set aside the Single Judge’s order and dismissed SICPA’s claim for refund.
Key Highlights of the Judgment
Biswanath Somadder (Chief Justice) and Bhaskar Raj Pradhan (Justice) stated:
In the impugned judgment, it was opined that the CGST Act does not provide for retention of tax without the authority of law. It is not the case of SICPA that the accumulated ITC is outside the provisions of ‘Chapter X‘. This means that the accumulation of ITC is through a legal statutory process. The refund envisaged by the Parliament on account of accumulated ITC is only in accordance with the provisions of section 54.
Section 54, however, does not envisage refund of unutilised ITC for closure of business. Thus, the rejection of the refund application is also within the parameters of section 54 and therefore, lawful. In such view of the matter, it could not have been held that the appellants were retaining tax without the authority of law. This opinion is based on the rendition of the Karnataka High Court in Slovak India (supra) holding that there is no express prohibition in terms of rule 5 of the Cenvat Credit Rules. In the Special Leave Petition against the judgement in Jain Vanguard Polybutlene Ltd. (supra), the Hon‘ble Supreme Court left the above question of law open. Further, this opinion of the Karnataka High Court in Slovak India (supra) has been differed from by the three Judges Bench of the Bombay High Court in Gauri Plasiculture (supra).
Broader Implications
(1) Legislative Intent
The judgment underscores the strict statutory design of Section 54(3). Parliament consciously limited refunds to avoid revenue leakage. Allowing refunds on closure would defeat legislative intent.
(2) Compliance for Businesses
Businesses winding up operations must be cautious. Accumulated ITC at closure cannot be claimed as refund; instead, it must be reversed under Section 29(5).
(3) Judicial Discipline
The Division Bench emphasised adherence to Supreme Court rulings in VKC Footsteps. High Courts cannot enlarge refund entitlements beyond the statute.
(4) Need for Legislative Clarity?
Although the Court rejected refund claims, the hardship faced by businesses with large unutilized ITC remains. This raises the question of whether Parliament should consider amendments to allow partial refunds on closure in specific circumstances.
Conclusion
Sikkim High Court’s ruling in Union of India v. SICPA India Pvt. Ltd. makes it abundantly clear: closure of business is not a ground for refund of unutilized ITC under the CGST Act. Section 49(6) must be read in conjunction with Section 54, and Section 54(3) confines refunds to only two scenarios.
Refund is not an inherent or constitutional right but a statutory concession, strictly governed by legislative text. While this interpretation may appear harsh for businesses closing operations, it aligns with principles of strict construction of tax statutes. Any relaxation or inclusion of closure as a refund ground must come through legislative amendment, not judicial innovation.
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