AUGUST 17 , 2020

By Baljit Singh Khara, IRS

THERE are divergent views regarding applicability of limitation for claiming refund of taxes paid by a registered person on a supply considering the same as intra-State and which is subsequently held to be inter-State and vice-versa. One view is that all refunds, except those under section 55 of the Central Goods and Services Tax Act, 2017 [CGST Act] are covered under section 54 ibid and, therefore, refunds mentioned in Section 77 ibid and section 19 of the Integrated Goods and Services Tax Act, 2017 [IGST Act] are governed by the limitation period of two years from relevant date as provided under the said section . The other view is that section 77 of CGST Act is independent of section 54 ibid, therefore, limitation of period as provided under the said section is not applicable for such refunds. In this article effort is being made to critically examine both the views in the light of the relevant legal provisions.

Goods and Services Tax [GST] is a destination-based consumption tax and the GST rates of tax on supplies of goods or services or both are the same throughout the country. In the intra-State supplies, Central GST [CGST] and State GST [SGST]/ Union Territory GST [UTGST] are levied and collected in the 50:50 ratio. The CGST goes to the Consolidated Fund of India and the SGST goes to the respective State/ UT exchequer. However, in case of inter-State supplies Integrated GST [IGST], which is equal to the sum total of the CGST and SGST, is levied on the said supply of goods or services or both and collected by the Union Government. One half of the IGST goes to the Consolidated Fund of India and the second half goes to the exchequer of the respective destination State/ UT as per the detailed procedure prescribed under the Goods and Services Tax Settlement of Funds Rules, 2017. This principle of destination-based consumption tax is the cardinal principle of the whole scheme of GST and, therefore, provisions under section 77 of CGST Act and section 19 of IGST Act provide for correction of errors, if any, in this regard.

To appreciate the issue at hand fully, the provisions of section 77 of the CGST Act and section 19 of the IGST Act are reproduced below:

Section 77(CGST). Tax wrongfully collected and paid to Central Government or State Government. (1) A registered person who has paid the Central tax and State tax or, as the case may be, the Central tax and the Union territory tax on a transaction considered by him to be an intra-State supply, but which is subsequently held to be an inter-State supply, shall be refunded the amount of taxes so paid in such manner and subject to such conditions as may be prescribed.

(2) A registered person who has paid integrated tax on a transaction considered by him to be an inter-State supply, but which is subsequently held to be an intra-State supply, shall not be required to pay any interest on the amount of central tax and State tax or, as the case may be, the Central tax and the Union territory tax payable.

Section 19 (IGST). Tax wrongfully collected and paid to Central Government or State Government. (1) A registered person who has paid integrated tax on a supply considered by him to be an inter-State supply, but which is subsequently held to be an intra-State supply, shall be granted refund of the amount of integrated tax so paid in such manner and subject to such conditions as may be prescribed.

(2) A registered person who has paid central tax and State tax or Union territory tax, as the case may be, on a transaction considered by him to be an intra-State supply, but which is subsequently held to be an inter-State supply, shall not be required to pay any interest on the amount of integrated tax payable.

From the perusal of the above provisions the following facts emerge:

(i) Sub-section (1) of section 77 of the CGST Act deals with a situation where CGST and SGST has been paid considering the supply "intra-State" and subsequently the same is held to be inter-State and, therefore, it is stipulated that in such situation the amounts of CGST and SGST, which were paid wrongly, shall be refunded and, of course, the registered person has to pay IGST on such supply for which no interest shall be required to be paid as stipulated under sub-section (2) of section 19 of the IGST Act.

(ii) Sub-section (1) of section 19 of the IGST Act deals with a situation where IGST has been paid considering the supply "inter-State" and subsequently the same is held to be intra-State and, therefore, it is stipulated that in such situation the IGST, which was paid wrongly, shall be refunded and, of course, the registered person has to pay CGST and SGST on such supply for which no interest shall be required to be paid as stipulated under sub-section (2) of section 77 of the CGST Act.

Article 265 of our Constitution stipulates that no tax shall be levied or collected except by the authority of law. The provisions laid down under sub-section (1) of section 77 of the CGST Act and sub-section (1) of section 19 of the IGST Act are strictly in line with the above said constitutional stipulation and provide that the amount paid as tax under wrong head has to be refunded. In both the situations, the tax-payer has paid amount equal to the tax leviable but under wrong head(s), as such the registered person was not beneficiary in any way on this account, the Union Government also got its share, however, the originating State or the destination State, as the case may be, could not get its due share.

Now, coming to the issue of refund, the relevant part of sub-section (1) of section 77 reads:

"...  shall be refunded   the amount of taxes so paid in such manner and subject to such conditions  as may be prescribed."

The word "shall" used here is in the sense of "must" as per such usage of this word in various statutes, therefore, the tax paid under wrong heads must be refunded. The word "Prescribed" as per clause (87) of section 2 of the CGST/SGST Act "means prescribed by rules made under this Act...".

The procedure for filing "Application for refund of tax, interest, penalty, fees or any other amount" is prescribed under rule 89 of the CGST Rules, 2017. This rule covers all refunds except refund under Section 55 and refund of IGST paid on goods exported out of India.

The refund under section 77 of CGST Act is specifically covered under Rule 89 of the CGST Rules as clause (j) of sub-rule (2) ibid stipulates that application in FORM GST RFD-01 under sub-rule (1) shall be accompanied by documentary evidence in the form of "a statement showing details of transactions considered as intra-State supply but which is subsequently held to be inter-State supply."

No limitation period is mentioned in section 77 of the CGST Act, therefore, the moot question is - should we seek shelter under section 54 so as to invoke limitation provisions to debar refunds under section 77 ibid beyond a period of two years from the relevant date which in this case would be "date of payment of tax" applying the residuary provision under clause (h) of Explanation (2) to section 54 ibid. In such situation, though the registered person will be liable to pay tax under correct head as and when the supply is 'held' to be "inter-state", may be in the third year but will not be entitled to claim refund of amount paid in wrong heads beyond the limitation period.

There is no mention of application of the provisions of section 54 ibid in section 77 ibid as we find at certain other places, e.g. sections 10(5), 21, 35(6) & 129(2) of the CGST Act where provisions of certain other sections have been made applicable  mutatis mutandis. Therefore, the author is of the view that the provisions which are not there, cannot be invented, as such interpolations will definitely lead to unnecessary litigation.

The second argument for invoking provisions of section 54 for refunds under section 77 of the CGST Act is that the words "refund of tax in pursuance of section 77" are mentioned in section 54(8)(d), hence such refunds are covered under section 54. The sub-section (8) of section 54 deals with certain situations where concept of unjust enrichment is not applicable, and the amount refunded has to be disbursed to the applicant instead of crediting it into the Consumer welfare Fund. Mentioning of refund "in pursuance of section 77" is apparently clarificatory in nature to make it amply clear that merely collection of tax amount which was paid in wrong head(s) (CGST+SGST/UTGST instead of IGST) does not debar the registered person from claiming the refund by invoking the principle of "unjust enrichment". The person had paid the amount which he had collected from the recipient as tax, though under wrong heads, but now he has paid the equal amount of tax in the correct head(s).

The provisions of refund under CGST Act are applicable to refund under IGST Act as stipulated under Section 20 of the IGST Act and similarly, the provisions of refund under CGST Rules are made applicable to the refund of IGST as provided by Rule 2 of the IGST Rules, 2017. Therefore, the refund of the wrongly paid IGST under section 19 of IGST Act has to be dealt on the similar lines as in the case of refund of wrongly paid CGST and SGST/UTGST under Section 77 of the CGST Act.

The provisions for refund under section 77 of the CGST Act and section 19 of the IGST Act simply present a "give and take" situation. Here the registered person has to pay the tax under the correct head when it is held subsequently that the supply which he considered as intra state was actually inter-state, thus instead of CGST and SGST/UTGST, IGST was required to be paid or the vice-versa and as the registered person pays the tax amount in correct head(s), the tax already paid [under wrong head(s)] is liable to be refunded.

It is also a fact that section 77 of the CGST Act and section 19 of IGST Act do not start with  non obstante clause "Notwithstanding" with regard to provisions of section 54 of the CGST Act, however, they also do not contain any wording like "subject to the provisions of..." referring to any other section including section 54, as many other provisions such as section 10(1), 10(2A), 16(2)(c), 60(5) etc. contain such provisions referring to some other section. Both the sections only stipulate that the amount of tax(s) so paid [under wrong heads] shall be refunded "in such manner and subject to such conditions as maybe prescribed" and the manner and conditions are prescribed in Rule 89 of the CGST Rules. Further, there is nothing to suggest that rule 89 is under section 54 only inasmuch as it is a rule laying down procedure for filing refund under GST except to specific exclusions.

The sub-section (2) of Section 77 of the CGST Act and sub-section (2) of section 19 of the IGST Act clearly stipulate that  no interest is required to be paid  when the payment is made under the correct head thus no allegation of non-payment of tax is made as it is merely correction of an error so as to comply with the "destination based, consumption tax" principle under GST.

It is also pertinent to mention here that there is no time limit specified in section 77 of CGST Act within which the supply can "...subsequently held to be inter-State supply" as well as in section 19 of IGST Act within which the supply can "...subsequently held to be intra-State supply". It simply means that as and when it is held so, the refund of wrongly paid tax "shall" be granted. Therefore, in view of the author no limitation appears to be there in section 77 of CGST Act or section 19 of the IGST Act, as the case may be, and the procedure for claiming refunds of tax wrongly collected and paid in wrong head(s) thereunder is prescribed under Rule 89 of CGST Rules without invoking the provisions of Section 54 of the CGST Act.

[The views expressed  are strictly personal views of the Author   based on the analysis of the legal provisions and do not in any manner reflect the views of the Government.]