Business Closure and the Fate of ITC: Analyzing Refund Eligibility

Introduction

The Goods and Services Tax (GST) regime in India, built on the principle of seamless credit flow, has long grappled with the question of refunding unutilized Input Tax Credit (ITC) in scenarios beyond zero-rated supplies and inverted duty structures. A landmark development in this regard has arisen from the Sikkim High Court’s ruling in SICPA India Pvt. Ltd. v. Union of India [2025(06)LCX0044], where the Court permitted the refund of unused ITC upon the closure of business. This decision challenges the prevalent interpretation of Section 54(3) of the CGST Act, 2017 and raises significant questions about statutory construction, fiscal discipline, and the potential for revenue leakage.

This article critically examines the legal foundations, interpretative deviations, and policy ramifications of the Sikkim High Court ruling and its interplay with the broader GST framework.

Statutory Framework Governing ITC Refund

Section 49(6) – Procedural Enablement

Section 49 of the CGST Act pertains to the payment of tax and maintenance of electronic ledgers. Subsection (6) reads:

“The balance in the electronic cash ledger or electronic credit ledger after payment of tax, interest, penalty, fee or any other amount... may be refunded in accordance with the provisions of section 54.”

This provision acts as an enabling clause, directing refund claims to the procedural framework of Section 54. It is not an independent substantive right.

Section 54(3) – Restrictive Substantive Right

Section 54(3) explicitly limits refund of unutilized ITC to only two cases:

1. Zero-rated supplies made without payment of tax.

2. Inverted duty structure, where input tax rate > output tax rate.

The provision begins with a negative command: “no refund... shall be allowed in cases other than...” indicating a restrictive legislative intent.

The Sikkim High Court’s Interpretation

The Sikkim High Court, in SICPA India, interpreted Section 49(6) as allowing refund of unutilized ITC even in the case of business closure, as long as the amount lies unused after payment of dues. The Court reasoned that:

This interpretation granted the taxpayer—who had closed operations and appropriately reversed ITC on capital goods—a refund of Rs. 4.37 crore of accumulated ITC lying unused in their Electronic Credit Ledger (ECL).

Departure from Precedent: VKC Footsteps & Beyond

The Sikkim High Court’s approach runs counter to binding Supreme Court precedent in VKC Footsteps India Pvt. Ltd. v. Union of India [2021(09)LCX0011], which held:

“Refund is a statutory right and must be governed strictly by the provisions of the statute. There is no constitutional entitlement to refund.”

In VKC Footsteps, the apex court denied refund of ITC on input services under inverted duty scenarios—despite arguments of inequity—clearly establishing that equitable considerations have no role in granting tax refunds unless explicitly sanctioned by statute.

Likewise, in Gauri Plasticulture Pvt. Ltd. [2019(06)LCX0137], the Bombay High Court held that CENVAT credit is a concession, not a vested right, and no refund can be allowed on business closure absent express provision.

Together, these cases form a consistent jurisprudence that refunds cannot be claimed outside the boundaries set by statute.

Rules of Interpretation Ignored

1. Expressio unius est exclusio alterius

This canon implies that explicit mention of certain scenarios (zero-rated/inverted duty) excludes all others (such as business closure). The Sikkim HC’s judgment fails this rule by expanding refund eligibility to an unmentioned scenario.

2. Strict Construction of Tax Statutes

The Supreme Court in CIT v. Calcutta Knitwears reiterated:

“There is no equity about a tax. Tax statutes must be strictly construed.”

The Court in SICPA India leaned on equity and property principles instead, an approach deemed unsuitable in tax jurisprudence.

3. Avoidance of Redundancy

If Section 49(6) is construed as allowing refund independent of Section 54(3), the strict limitations of Section 54(3) become redundant. Courts must interpret laws to avoid such statutory surplusage. The Sikkim HC’s interpretation breaks this tenet.

Potential Policy Fallout and Risk of Abuse

Allowing refunds on business closure opens the floodgates to potential abuse:

This undermines GST’s architecture, which treats ITC as an adjustment mechanism—not a refundable asset—except in narrowly defined cases.

The Slovak India and Eicher Motors Line of Argument

The Sikkim HC relied on Slovak India Trading Co. Pvt. Ltd. [2006(07)LCX0039] and Eicher Motors Ltd. v. Union of India [1999(01)LCX0018], which held that accumulated CENVAT credit cannot be retained without statutory authority.

However, both judgments pertain to pre-GST regimes with different legislative frameworks and are considered distinguishable by larger benches and later decisions such as Gauri Plasticulture and Ind-Swift Laboratories, which stress legislative constraints on credit refunds.

Sikkim HC on Alternative Remedy and Maintainability

The Respondent argued that the petitioner should have pursued statutory appeal under Section 112 of the CGST Act. The Court rejected this, invoking Godrej Sara Lee Ltd. v. Excise Officer and reaffirmed that alternative remedy is a rule of discretion, not a jurisdictional bar.

This part of the decision is legally sound. Writ jurisdiction under Article 226 remains open, particularly for pure questions of law.

Conclusion

The Sikkim High Court’s ruling granting refund of unutilized ITC upon business closure may offer reprieve to taxpayers like SICPA India Pvt. Ltd., but it departs from legislative text, judicial precedent, and foundational principles of GST.

While the judgment invokes fairness, it does so at the cost of legal consistency. It elevates Section 49(6) into a source of substantive entitlement, severed from the limitations of Section 54(3), effectively rewriting the statute.

From a tax administration standpoint, this interpretation risks misuse and threatens the integrity of the ITC framework. In a system premised on tax neutrality through credit offsets, allowing unconditional refund on cessation of business introduces moral hazard and distorts the GST value chain.

Unless clarified by the Supreme Court or amended legislatively, this ruling remains a jurisdictional outlier. For now, tax officers and businesses alike must tread cautiously and recognize that in tax law, equity follows the statute—not the other way around.

Key Takeaways:

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.