How to get Refund of Accumulated ITC on Business Closure or Suspension under GST

Ca in Udaipur discuss the legal provisions, case laws, procedural requirement and how businessmen can be benefitted for refund claim in case of closure business

Businesses winding up or suspending operations often face the challenge of unutilized Input Tax Credit (ITC) accumulated under the GST regime. While the CGST Act explicitly allows refunds of accumulated ITC in limited cases, refunds on account of business closure or suspension are not clearly addressed in the statute. However, recent judicial pronouncements have brought clarity and hope for taxpayers seeking refunds of their unutilized ITC upon business closure.

1. Provisions Under the CGST Act

• Section 54(3) of the CGST Act, 2017 provides for refund of accumulated ITC only in two specific cases:
  1. Zero-rated supplies made without payment of tax (exports, SEZ supplies).
  2. Accumulation of ITC due to an inverted duty structure, i.e., when the rate of tax on inputs is higher than the rate on output supplies (excluding nil-rated or fully exempt supplies), unless notified otherwise.
• No explicit provision for refund of ITC on business closure or suspension is currently mentioned in Section 54(3).
• Section 49(6) of the CGST Act mandates that ITC availed on inputs held in stock and inputs contained in semi-finished or finished goods on the day of business closure or suspension shall be reversed by the taxpayer, as those credits can no longer be utilized.

2. Can a Business Get Refund on Closure or Suspension?

• Strictly as per the letter of the law, no, since Section 54(3) does not explicitly permit refunds on closure or suspension.
• However, courts have recognized that retention of ITC without legal basis amounts to unjust enrichment and therefore allowed refunds.

3. Case Law

• Sikkim High Court — SICPA India Private Ltd v. Union of India (2023)
  This landmark ruling allowed refund of accumulated ITC on business closure. The court held that while Section 54(3) does not explicitly provide for refunds on closure, Section 49(6) does not bar refunds. The court relied on principles from earlier CENVAT jurisprudence and held that withholding refund in absence of statutory restriction is not permissible.
• Karnataka High Court — M/s Slovak India Pvt Ltd v. Union of India
  The Court held that credits under the erstwhile regime were refundable and set a precedent for refund claims.
• Other High Courts, like Calcutta High Court, have passed interim orders protecting taxpayer rights in GST matters but no conclusive ruling specifically on ITC refund on closure yet.

4. Pending Cases in State High Courts

• Multiple High Courts have pending matters concerning the interpretation of refund provisions under Section 54(3) in relation to business closure or discontinuation.
• The outcomes of these cases may provide further clarity and precedents.

5. Proofs and Documents Required for Refund Application

To claim a refund of accumulated ITC (especially on closure/suspension), taxpayers should prepare the following:

• Final GST Returns (GSTR-3B, GSTR-1) filed up to the date of closure.
• Business Closure Certificate/Notification submitted to tax authorities.
• Reconciliation Statement of input tax credit availed and utilized.
• Details of Inputs, Semi-finished and Finished Goods Stock on the date of closure (as per Section 49(6)).
• Proof of payment of taxes on inputs, if applicable.
• Bank details and GSTIN.
• Refund application in Form GST RFD-01, with category selected for refund of ITC.

6. Procedure to Claim Refund

1. File all pending GST returns up to the date of business closure.
2. Reverse ineligible credits and maintain detailed stock records.
3. File refund application in Form RFD-01 electronically on GST portal.
4. Attach necessary documents supporting closure and ITC claim.
5. Follow-up with GST authorities for processing and respond promptly to queries.
6. in the event that the refund is declined, you may wish to consider approaching  to appellate authority, as may be appropriate.”

7. Case Study: SICPA India Pvt Ltd (Sikkim HC)

• SICPA India Pvt Ltd closed its manufacturing unit, accumulated ₹4.37 crore of ITC.
• Tax authorities denied refund, citing Section 54(3).
• The company filed writ petition.
• The Sikkim High Court ruled in favour, stating the law does not allow retention of ITC without statutory authority and allowed refund.
• This case sets precedent for other businesses facing similar issues.

8. How ca in Udaipur Consulting Can Assist Clients

• GST Compliance Audit: Review clients’ ITC records, stock statements, and returns to ensure proper compliance before closure.
• Documentation Preparation: Assist in preparation of closure notices, stock statements as per Section 49(6), and other proof.
• Refund Filing: Handle filing of refund claims, including drafting submissions and responding to GST authorities.
• Litigation Support: Represent clients in writ petitions or appeals if refund claims are rejected.
• Legal Advisory: Keep clients updated on emerging case law and Supreme Court developments.
• Risk Mitigation: Advise on timelines and documentation to avoid rejection or delays.

Final Thoughts

Though the CGST Act does not explicitly provide for refund of accumulated ITC on business closure or suspension, Clients contemplating business closure should act proactively with Proper documentation, timely filing, and it is advisable to consult with tax professionals consultants or expert guidance are crucial for a successful claim. Our CA in Udaipur team is ready to assist you every step of the way.