The jurisprudence surrounding refund of unutilized Input Tax Credit (ITC) under the Goods and Services Tax (GST) regime is witnessing significant evolution. A landmark ruling by the Hon’ble High Court of Sikkim in SICPA India Pvt. Ltd. v. Union of India (WP(C) No. 54/2023) has clarified a grey area involving the refund of unutilized ITC upon closure of business. The Court has interpreted the provisions of Sections 49(6) and 54(3) of the Central Goods and Services Tax Act, 2017 (“CGST Act”) in favour of the taxpayer, recognizing the substantive right to refund under certain conditions.

• Section 49(6): Permits refund of balances in the electronic credit ledger or cash ledger in accordance with Section 54 of the CGST Act.

• Section 54(3): Provides refund of unutilized ITC only in two scenarios:
o (i) zero-rated supplies without payment of tax; or

o (ii) accumulation due to inverted duty structure.

This restrictive language in Section 54(3) has traditionally been interpreted to mean that refunds outside these two situations, including on closure of business, are not permissible.

A Full Bench of the Bombay High Court took a contrary view (under the excise regime), holding that cash refund of unutilized credit is not permissible on closure of a unit in the absence of a specific statutory provision. The Bombay HC reasoned that Section 11B of the Central Excise Act (governing refunds) did not envision refund of CENVAT credit except in prescribed cases, and one cannot infer a refund right where the law is silent. In that judgment, the court pointed out that the Supreme Court’s dismissal of the Slovak India SLP was not a speaking order on merits and thus did not settle the law. The view emphasizes the general principle that exemptions or refunds in tax law must be expressly provided – no equitable considerations can override clear statutory limits. Indeed, tax statutes are typically strictly construed, and courts ordinarily refrain from reading in additional reliefs (a concept echoed by a CESTAT Larger Bench in Steel Strips, which opined that absence of an express refund provision means no refund can be claimed. This strict approach treats the “no refund except…” language as a deliberate legislative exclusion of all other cases.

In the instant case, SICPA India Pvt. Ltd. discontinued its business in Sikkim and sought refund of ₹4.37 crore in unutilized ITC. The department rejected the refund citing Section 54(3), arguing closure of business does not fall within the permissible grounds for refund.

• Section 49(6) empowers refund of unutilized ITC post tax payments, subject to procedural compliance under Section 54, not substantive restrictions under Section 54(3).
• The statute does not explicitly prohibit refunds on business closure.
• Relying on precedents like Slovak India Trading Co. Pvt. Ltd. and Eicher Motors Ltd., the Court opined that vested tax credits cannot be retained by the State without the authority of law.

• It reiterated the constitutional bar on unjust enrichment of the exchequer and emphasized the doctrine of substantial justice over procedural technicalities.

The refund was consequently ordered to be paid, setting aside the department’s order.

This decision reaffirms critical principles:
• Audi alteram partem: Procedural rights should not override substantive entitlements.
• Falsus in uno, falsus in omnibus: A rigid interpretation of Section 54(3) may be legally inconsistent when read with Section 49(6).

• Lex non cogit ad impossibilia: Law does not compel compliance with impossible procedural barriers when no substantive prohibition exists.

1. Constitutional Validity of Restrictive Refunds: The Apex Court may examine whether the restrictive language of Section 54(3) violates Article 14 or Article 265 (no tax without authority of law).
2. Doctrine of Legitimate Expectation: Taxpayers who have accumulated ITC in the ordinary course of business possess a legitimate expectation of utilization or refund, failing which it results in economic deprivation.
3. Revenue Neutrality: As unutilized ITC does not burden the exchequer when refunded from previously credited tax, the Court may invoke the doctrine of revenue neutrality.

4. Potential Retrospective Amendment: If the Supreme Court upholds the refund, the government may seek to amend Section 54(3) retrospectively to curb such interpretations. This could trigger litigation under Article 19(1)(g) for curtailing business rights.

The Sikkim High Court’s decision in SICPA India is a progressive development towards harmonizing tax statutes with constitutional mandates of fairness, equity, and non-arbitrariness. While the CGST law appears rigid in structure, judicial interpretation can render it flexible when circumstances demand.
It is imperative for the GST Council to consider amending Section 54(3) to explicitly clarify treatment of ITC refunds upon closure of business, thereby reducing litigation and fostering ease of exit from business under the GST regime.

Taxpayers are advised to closely monitor any future clarification by the GST Council or decision of the Hon’ble Supreme Court on this issue, as it will have a decisive impact on the permissibility of refund claims for unutilized ITC on business closure. Until then, claims can be filed citing favourable High Court rulings, but the legal position remains evolving and unsettled.