Refund of ITC in GST on Discontinuation of Business

Refund of ITC in GST on Business Closure What You Must Know

If a registered taxpayer shuts down their business, they can claim a refund of unutilized Input Tax Credit (ITC) under GST.

Legal Provision for ITC Refund on Closure

• As per Section 54(10) of the CGST Act, the proper officer may refund any balance in the electronic credit ledger if:
• This refund is not automatic. It must follow a structured process and is subject to verification by tax authorities.

Who Can Claim ITC Refund After Closure?

The refund is permitted for any registered person whose:

• There is a balance ITC in the credit ledger at the time of cancellation.
• No tax liability or pending dues are outstanding.

Key Steps to Claim ITC Refund on Closure

1. Apply for Cancellation of Registration
   File Form GST REG-16 stating reason for closure.
2. Clear Outstanding Liabilities
   Ensure no dues remain under GST before applying for refund.
3. File Refund Application
   Submit Form GST RFD-01 electronically within two years from the date of cancellation.
4. Supporting Documents
   Include:
   • Copy of cancellation order
   • Electronic credit ledger statement
   • Declaration of no tax dues
   • Certificate by CA/CMA (if refund > ₹2 lakh)

Restrictions and Clarifications

• Refund is restricted to balance in electronic credit ledger.
• No refund allowed for:
  • Blocked credits under Section 17(5)
  • Capital goods input tax unless sold and reversed under Rule 44
• Circular No. 166/22/2021-GST clarifies that ITC refund on closure is valid even if no outward supplies were made recently.

Practical Example

A small business owner in Tamil Nadu closes operations due to financial loss. At that time, their credit ledger has ₹75,000 in unutilised ITC. They can apply for a refund under RFD-01 before 9 March 2027, provided they meet the compliance checklist.

Expert Tip

While applying for the refund, reconciliation of GSTR-3B and GSTR-2A strengthens your claim.

FAQs

Q1: Can I claim refund of ITC after surrendering voluntary registration?
Yes, if you have ITC balance in your credit ledger at the time of cancellation.

Q2: Is refund allowed for composition taxpayers?
No. Composition scheme dealers cannot claim ITC refund.

Q3: What happens if I miss the 2-year deadline?
You will lose the right to claim refund. Timely filing is critical.

Final Thoughts

If your business is shutting down, don’t leave money on the table. Apply for ITC refund under GST to recover unutilised credit. Use Efiletax to get expert help in filing your RFD-01 and ensuring compliance with cancellation procedures.

Need help with ITC refund on business closure?
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Summary
When a GST-registered business closes, unutilised ITC can be refunded under Section 54(10) of the CGST Act. Apply via Form RFD-01 within two years of cancellation. Ensure compliance with Rule 89 and submit proper documentation for smooth refund processing.

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