CBIC Clarification dated 18.07.2025 puts an end to the BSS refund litigation initiated by the GST Authorities in Sikkim

The CBIC clarification (Letter No. CBIC-110267/107/2023-CX) issued on 18.07.2025 has put an end to the significant litigation initiated by the Sikkim GST authorities regarding alleged excess refund claims under the BSS for eligible manufacturing units in Sikkim. The CBIC clarification confirms that eligible units are entitled to claim BSS refunds based on their actual value addition under BSS refund notification rather than being restricted by a fixed cap as specified in the table under Para 5.8 of the BSS Notification dated 05.10.2017.

Before delving into this specific litigation resolved by the above CBIC clarification dated 18.07.2025, it is necessary to understand the excise incentives and GST refunds under the Area-Based Exemption Refund Schemes (NEIP 1997 & NEIIPP 2007) and BSS for the North-East region (including Sikkim).

A. Background

(1) Area-Based Exemption refund under NEIP 1997 & NEIIPP 2007

The Government of India introduced the North-East Industrial Policy (NEIP) 1997 to promote industrial development and employment generation in the North-East region (NE Region). The policy offered 10 years of Central Excise duty incentives to eligible manufacturing units located in the NE region. In 2007, this policy was extended for an additional ten years under the North-East Industrial and Investment Promotion Policy (NEIIPP), 2007.

Until 2008, eligible units received 100% refund of the excise duty paid in cash, after utilizing available CENVAT credit. The following example illustrates how the refund was calculated during this period.

Illustration 1: An eligible manufacturing unit located in Sikkim, producing Product "X" under Chapter 33 (Tariff heading), had an excise duty payable of INR 1,000 on goods cleared during a particular month. The unit paid this liability by utilizing available CENVAT credit of INR 300, and the remaining amount of INR 700 was paid in cash. The calculation of the eligible refund is as follows:

After 2008, the Government of India by way of an amended notification restricted refunds to the amount of duty payable on the value addition of the product cleared by the eligible unit. The amended notification prescribed value addition (Refund) rates for each product based on its chapter (Tariff heading). For example, 56% refund for products under Chapter 33 and 38% refund for Chapter 34, (referred to as "Normal rate of refund"). The amended notification also provided provision for "Special rate refund" allowing eligible units to apply for a higher refund if the actual value addition of the product is higher than the normal rate subject to approval of the Commissioner. The illustrations below explain both refund calculations.

Illustration 2: An eligible manufacturing unit located in Sikkim, producing Product "X" under Chapter 33, paid an excise duty of INR 1,000 on goods cleared during a particular month. The unit utilized available CENVAT credit of INR 300, and the remaining amount of INR 700 was paid in cash. The product has a normal refund rate of 56% as per the Tariff, while its actual value addition is 75%. The calculation of the refund under both the normal rate and the special rate is as follows.

Normal rate refund:

Special rate refund:

(2)  Budgetary support scheme introduced in view of the implementation of GST

In light of the implementation of the GST regime in 2017, the Area-Based Exemption Scheme was replaced by BSS to continue providing support to eligible units for the remaining exemption period. In this context, the government issued the BSS Notification dated 10.07.2017, specifying the refund percentages under Para 5.1, as detailed below:

"5.1. The amount of budgetary support under the scheme for specified goods manufactured by the eligible unit shall be sum total of -

(i) 58% of the Central tax paid through debit in the cash ledger account maintained by the unit in terms of sub-section (1) of section 49 the Central Goods and Services Act, 2017 after utilization of the Input tax credit of the Central Tax and Integrated Tax.

(ii) 29% of the integrated tax paid through debit in the cash ledger account maintained by the unit in terms of section 20 of the Integrated Goods and Services Act, 2017 after utilization of the Input tax credit Tax of the Central Tax and Integrated Tax.

Illistration 3: An eligible manufacturing unit located in Sikkim producing Product "X" under Chapter 33, clears goods within the state and pays CGST and SGST on its outward supplies. The unit utilizes ITC of INR 400 each towards both CGST and SGST and pays the remaining tax of INR 600 in cash. The unit is entitled to a refund of 58% of the CGST paid in cash as per the BSS Notification. The calculation of the eligible refund is as follows

Note: The refund is calculated only on CGST paid in cash, not on the portion covered by ITC. SGST is not Refunded under BSS Notification.

Illustration 4: An eligible manufacturing unit located in Sikkim, producing Product "X" under Chapter 33, clears goods for inter-state supply and pays IGST on its outward supplies. The unit utilizes IGST of INR 400 towards IGST and pays the remaining tax of INR 600 in cash. The eligible unit is entitled to a refund of 29% of the IGST paid in cash as per the BSS Notification. The calculation of the eligible refund is as follows:

The BSS Notification also imposed key conditions, which were interpreted by the GST authorities and led to the recent dispute. These conditions are summarized below:

(a) Para 5.3 of BSS notification states that the facility for determination of a special rate (available in the Area-Based exemption notification) would not apply under the BSS refund.

(b) Para 5.8 of BSS notification states where the Central Tax or Integrated Tax paid on value addition is higher than the Central Tax or Integrated Tax worked out on the value addition shown in column (4) of the table below, the unit may be taken up for verification of the value addition. The extract of the relevant table from notification is given below:

TABLE

Explanation: For calculation of the value addition the procedure specified in notification no 01/2010-CE dated 06.02.2010 of the Department of Revenue as amended from time to time shall apply mutatis-mutandis

(3) The Interpretation of Para 5.8 of the BSS Notification by the Sikkim GST Authority 

The Sikkim GST authorities recently interpreted Para 5.8 of the BSS Notification, stating that the BSS refund benefit is capped at the prescribed value addition specified in column (4) of the table. However, certain industries had claimed refunds based on actual value addition, even though the provision for a special rate had been discontinued, resulting in excess refunds.

Based on this interpretation, the GST authorities concluded that the BSS refund should be calculated by first capping the value addition of the product according to the applicable rate for the relevant chapter, as specified in the table mentioned above. Then, the BSS refund percentage (IGST 29% & CGST 58%) is applied to this capped value addition.

As per the GST authorities, the calculation of the BSS refund (illustration 4) is as follows.

In view of the above recalculation, the GST authorities concluded that the industries had received an excess BSS refund. Consequently, demand notices were issued to the respective industries for the recovery of the excess refund.

(4)  The issue resolved by CBIC clarification dated 18.07.2025

The pharmaceutical industry approached DPIIT seeking clarification on the GST authorities' interpretation regarding the restriction of the BSS refund. In response, DPIIT forwarded the industry's representation to the CBIC for further clarification. CBIC, considering the industry's representation as genuine, issued a clarification dated 18.07.2025, stating that value addition beyond the prescribed limit specified in the table under Para 5.8 is permissible. Accordingly, units are eligible to claim refunds based on actual value addition, subject to verification. The extract of the relevant para is given below for ready reference.

"8. Accordingly, It is clarified that both Para 5.8 of the DPIIT Notification dated 05.10.2017 and CBIC Circular No. 1060/9/2017-CX specify that the value addition beyond the prescribed limit specified in the Table under Para 5.8 is permissible. Accordingly, units are eligible to claim refunds based on actual value addition, subject to verification. Therefore, it is requested that the sanction of such refund claims be made only after due verification of the declared value addition."

In view of the above clarification, the interpretational dispute regarding BSS refunds has been put to rest. The GST authorities have initiated the process of dropping the demands previously issued to the industries. Further, the writ petitions filed by the industry before the Hon'ble High Court of Sikkim challenging these demands have now been disposed of in light of the CBIC clarification.

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