In a landmark judgment dated October 28, 2025, the Supreme Court upheld the Gujarat High Court’s ruling and allowed refund of unutilized input tax credit (ITC) of GST Compensation Cess accumulated on inputs used to manufacture exported goods. The Court refused to interfere with the High Court’s decision, effectively affirming that exporters are entitled to such refunds even where exports are made with payment of IGST (the “IGST route”).
Understanding the Context of the Issue
Consider a manufacturer who exports finished goods. To run the plant, the company buys coal and pays Compensation Cess on those purchases. When the finished goods are exported, no Compensation Cess is charged on the export invoices. That means the cess you paid on inputs sits in your electronic credit ledger with nothing to set it off against. Over time, these balances grow into dead capital on your books.
Exporters took the obvious step: ask for a refund of this stranded cess credit. After all, exports are “zero-rated” under GST, and the broader GST design promises that taxes do not stick to exports. But the department pushed back, citing circulars and the idea that if the exporter chose the IGST route (i.e., paid IGST on exports and took a refund of that IGST from Customs), then refund of Compensation Cess ITC should not also be allowed. This is where the litigation began.
The Gujarat High Court’s Call
The case that moved the needle involved an exporter who used coal as an input, accumulated Compensation Cess credit, and exported the finished goods. The company asked for a refund of the cess ITC. The department refused, essentially saying: “You exported with payment of IGST; the circulars don’t allow a separate refund of cess ITC.”
The Gujarat High Court looked at the law in two steps. First, it examined Section 54(3) of the CGST Act, which is the backbone of refunds of unutilized ITC in cases like zero-rated supplies. Second, it looked at Section 11 of the Compensation Cess Act, 2017, which says that the provisions of the CGST/IGST Acts—including ITC and refunds—apply to Compensation Cess as well. Put simply, the cess rides on the same rails as GST for credit and refund.
Having set that foundation, the Court addressed the circulars. Circulars guide administration, but they do not override the statute. If the law says refunds are available, a circular cannot take that right away. On that logic, the High Court allowed the refund of unutilized Compensation Cess ITC.
The Supreme Court Steps In – And Steps Back
The Union of India challenged the Gujarat decision before the Supreme Court. On 28 October 2025, the Supreme Court declined to interfere. In practical terms, that means the High Court’s reasoning stands. The top court agreed that exporters can get a refund of the unutilized Compensation Cess ITC that arises from zero-rated exports—even if the exporter chose to ship goods with payment of IGST. It also accepted that circulars cannot be used to cut down a statutory entitlement.
For businesses, this is the clarity that’s been missing. We now have a clean confirmation from the apex court: unutilized Compensation Cess ITC attributable to exports is refundable.
Why the Law Points This Way
GST has always promised two big things for exports:
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Zero-rating: Exports should go out without domestic tax embedded in the price.
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No trapped credit: If you can’t use the credit because your output is zero-rated, you should be able to get it back as a refund.
Compensation Cess is a special levy to compensate states, but the law deliberately plugged it into the same credit-and-refund machinery as GST. That connection is what Section 11 of the Cess Act does: it says, in effect, “treat Compensation Cess like GST for credit and refund.”
There is a proviso in Section 11 that limits utilization of cess credit (you can use cess credit only to pay cess, not to pay CGST/SGST/IGST). Departments often stretched that proviso to argue that refunds should also be limited. But utilization and refund are different concepts: the first is about how you set off credit against output tax; the second is about returning credit when it can’t be used. The Court’s view respects that distinction. If exports don’t attract Compensation Cess, the cess credit naturally accumulates. The refund provision exists to clear that build-up.
The controversy about export route (LUT/Bond versus IGST) added a layer of confusion. Historically, many exporters chose LUT/Bond because refund of ITC sits squarely in that route. The department’s position was that once you go by the IGST route—pay tax on exports and get that tax back—you shouldn’t also get a refund of accumulated cess ITC. The Court rejected this binary reading. The law’s promise is that taxes should not stick to exports; it doesn’t say you lose your refund of stranded input cess merely because you paid output IGST and got that back.
What This Means for Your Business
Immediate cash flow relief: If you’ve been carrying Compensation Cess ITC on inputs like coal, you can now unlock that balance. For coal-dependent manufacturers—steel, paper, ceramics, chemicals, power-adjacent industries—the numbers can be significant. This is not a niche benefit; it can reshape quarterly cash positions.
More flexibility in choosing your export route: With the refundability of cess ITC confirmed even under the IGST route, the choice between LUT/Bond and IGST becomes a practical, business-led decision again. You can weigh documentation comfort, refund timelines, and system readiness without the fear of “losing” cess refunds because you picked one route over the other.
Fewer disputes on circulars: The decision reaffirms a basic hierarchy: Acts first, circulars second. Where circular language seems to pull back a statutory right, adjudication should now follow the statute. In day-to-day terms, that means fewer long arguments about the fencing put up by circulars when the Act itself opens the gate.
Greater consistency across field formations: With the Supreme Court’s stamp, refund claims of this nature should see more uniform treatment. While individual files will still be tested on documentation and nexus, the central legal question is settled.
What You Should Do Next – A Practical Playbook
1) Take stock of your cess exposure:
Start by mapping where Compensation Cess sits in your supply chain. Most commonly, it’s coal, but list all inputs where cess has been paid. Reconcile purchase registers, GSTR-2B, and the electronic credit ledger to identify the balances that have piled up purely because your exports carried no cess.
2) Quantify the opportunity:
Look at how much cess credit is unutilized, month by month. Build a simple model: opening balance, cess ITC availed, any utilization (if at all), and closing balance. The goal is to arrive at a robust, defensible figure for refund—by tax period—so you can plan filings in tranches if necessary.
3) Build the nexus story:
Refunds move faster when the “trail” is clear. Collate purchase invoices for cess-bearing inputs, production or consumption records that tie inputs to finished goods, and export documentation (commercial invoices, shipping bills, EGM/LET Export). If you maintain a bill of materials or standard consumption norms, put those on record. The stronger your nexus, the fewer questions at scrutiny.
4) Decide your route going forward:
With the refund question settled, re-evaluate whether your standard practice should be LUT/Bond or payment of IGST on exports. The answer may differ by product line, customer geography, or operational convenience. For example, you might continue IGST on high-volume SKUs where shipping bill–GSTN coordination is seamless, and LUT where documentary control feels tighter. The key point is: you no longer need to shape this decision around the fear of losing cess refunds.
5) File, reopen, or refire claims:
If you held back refund applications waiting for clarity, prepare the filings now. If your claim was rejected earlier solely on the basis of circulars or because you exported on payment of IGST, consider appeal or rectification citing the Supreme Court outcome. Where orders are within limitation, move promptly. Where limitation is tight, explore remedies on the strength of a subsequent apex court ruling settling the law.
6) Tighten internal SOPs for refunds:
Standardize a monthly reconciliation pack: cess ITC ledger, purchase listings, 2B-to-books tie-out, and a one-page narrative linking inputs to exports. Establish maker–checker controls for computations under Rule 89 (where applicable) and keep a ready index of attachments so the refund officer doesn’t have to hunt for documents.
7) Update cash flow planning and banking lines:
Reflect expected refunds in treasury forecasts. If you use working capital lines to bridge liquidity, speak to your bankers about line sizing once refunds start flowing in. The aim is to translate legal relief into lower financing cost and tighter cash cycles.
8) Watch for administrative housekeeping:
Expect the department to issue clarifications aligning field practice with the ruling—possibly tweaking FAQs, removing contradictory lines in older circulars, or nudging refund utilities. Keeping an eye on these updates helps avoid procedural friction even when the core entitlement is now clear.
The Bottom Line
The Supreme Court’s decision restores the promise that taxes shouldn’t cling to exports. For exporters using cess-bearing inputs, especially coal, this is tangible money returning to the business. It also restores choice: you can decide how to export based on operational logic, not defensive tax structuring.
If you’re a CFO or tax head, the immediate to-do list is straightforward: measure your cess balances, assemble a crisp nexus file, plan filings, and revisit past rejections. If you’re on the shop floor or in finance operations, the task is to keep the paperwork clean and the trails short. The law has opened the door; the rest is about walking through it with a well-prepared file.