When dissolving a company, one of the key concerns is whether any Input Tax Credit (ITC) accumulated in the GST ledger can be claimed as a refund. Many businesses accumulate ITC from administrative expenses, capital goods, and regular business purchases, and they want to recover this when winding up operations.
However, not all ITC is refundable under GST rules. This article provides a detailed breakdown of whether ITC can be refunded, when it applies, and what steps you need to take.
Understanding GST Refunds During Company Dissolution
Types of Refundable GST Amounts
When closing a business, you may be eligible for a GST refund in two cases:
- Refund of Balance in the Electronic Cash Ledger
- If you have any excess tax paid (either due to overpayment or advance tax deposits), you can apply for a refund.
- Refund can be claimed using Form GST RFD-01.
- Refund of ITC in Specific Situations
Refund of unutilized ITC is allowed only in two cases:- Zero-rated supplies (Exports and SEZ sales without tax payment)
- Inverted Duty Structure (Where GST on inputs is higher than GST on output supplies)
TC from general administrative expenses (such as rent, office expenses, and professional fees) is not refundable when dissolving a company.
Refund of ITC Under Inverted Duty Structure (Rule 89(5))
One common query is whether a refund can be claimed under the inverted duty structure when shutting down a business.
What is an Inverted Duty Structure?
An inverted duty structure occurs when the GST rate on inputs (purchases) is higher than the GST rate on outputs (sales), leading to an accumulation of ITC that cannot be fully utilized.
Example of Eligible Cases for Refund:
- A manufacturer buys raw materials at 18% GST but sells finished goods at 5% GST.
- A trader purchases items at 12% GST but sells them at 5% GST.
Not Eligible for Refund:
- Service providers (such as consultancy firms, IT companies, law firms) since their input tax is not higher than their output tax.
- Businesses where output GST is equal to or higher than input GST.
- ITC from administrative expenses cannot be refunded under Rule 89(5).
Why ITC on Administrative Expenses Cannot Be Claimed as a Refund
- Expenses like office rent, professional fees, internet, legal services, and utilities are not considered inputs under Rule 89(5).
- Rule 89(5) applies only when inputs are directly used in outward taxable supplies.
- When a company deregisters from GST, any remaining ITC in the credit ledger lapses and cannot be claimed as a refund.
Process for Claiming GST Refund Before Company Dissolution
If you are eligible for a refund, follow these steps:
Step 1: File Final GST Returns
- File GSTR-10 (Final Return) within 3 months of cancellation.
- Ensure that ITC is utilized against liabilities before cancellation.
Step 2: Apply for GST Refund (If Eligible)
- Refund for cash ledger balance can be claimed using Form GST RFD-01.
- Refund of ITC is only allowed in the cases of zero-rated supplies or inverted duty structure.
Step 3: Adjust Liabilities Before Closure
- If ITC is available, use it to offset any pending GST dues.
- Any balance ITC will lapse upon cancellation, so it should be adjusted before final return filing.
Final Takeaways
ITC from administrative expenses is not refundable under GST when closing a company. Refund is possible only for cash ledger balance, zero-rated supplies, or inverted duty structure cases. GSTR-10 must be filed within 3 months of GST cancellation. Before cancellation, use ITC to pay any outstanding tax liabilities. Once GST registration is canceled, ITC in the credit ledger cannot be claimed as a refund.
Would you like help in filing GST cancellation and refund applications? Let us know in the comments below!
For more GST updates and compliance tips, visit StoxNTax.com!
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