Incorrect collection of GST: Way out

Given the federal structure, India has adopted a dual model of GST with simultaneous levy of GST by the Central and the State. For intra-state transactions, CGST & SGST shall be levied by the Centre and the state respectively; and for inter-state transaction, IGST shall be levied by the Centre and it shall be adjusted among the States internally.   

Section 10, 11, 12 and 13 of IGST Act, 2017 deals with place of supply to determine whether a supply of goods or service is intra-state or interstate supply. However, one of the major cause of disconnect in implementation of the GST is the complexity of the place of supply provisions especially in the case of supply of service, owing to its inherent characteristics.

It is quite possible that a supply which was understood as intra-state supply as the inception could be actually an interstate supply or vice-versa. The GST law, itself provides for such situations and it is covered under section 77 of the CGST Act, 2017 and section 19 of the IGST Act, 2019. Section 77 is reproduced as below:

(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 of IGST Act, 2019 is reproduced as below:

(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.

Thus, if a registered person 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; or vice-versa, he shall be refunded the amount of taxes so paid in such manner and subject to such conditions as may be prescribed. One relief is granted to the tax payer, is that he will not be required to pay the interest.

Refund of wrong tax collected and paid

Clause (d) of Section 54(8) states that the refund of wrong tax collected and paid u/s 77 shall be paid to the registered person instead of being credited to consumer welfare fund. Section 54(8) is reproduced as below:

Notwithstanding anything contained in sub-section (5), the refundable amount shall, instead of being credited to the Fund, be paid to the applicant, if such amount is relatable to

a.     refund of tax paid on export of goods or services or both or on inputs or input services used in making such exports;

b.     refund of unutilised input tax credit under sub-section (3);

c.      refund of tax paid on a supply which is not provided, either wholly or partially, and for which invoice has not been issued, or where a refund voucher has been issued;

d.     refund of tax in pursuance of section 77;

e.      the tax and interest, if any, or any other amount paid by the applicant, if he had not passed on the incidence of such tax and interest to any other person; or

f.       the tax or interest borne by such other class of applicants as the Government may, on the recommendations of the Council, by notification, specify.

Adjustment of refund against demand

Rule 92 of CGST Rules, 2017 provides for adjustment of refund against any demand, whether under this act or any other act. Rule 92(1) is reproduced as below:

Where, upon examination of the application, the proper officer is satisfied that a refund under sub-section (5) of section 54 is due and payable to the applicant, he shall make an order in FORM GST RFD-06 sanctioning the amount of refund to which the applicant is entitled, mentioning therein the amount, if any, refunded to him on a provisional basis under sub-section (6) of section 54, amount adjusted against any outstanding demand under the Act or under any existing law and the balance amount refundable:

Provided that in cases where the amount of refund is completely adjusted against any outstanding demand under the Act or under any existing law, an order giving details of the adjustment shall be issued in Part A of FORM GST RFD-07.

Rule 92 (1) authorizes the Revenue to adjust the tax, if any, outstanding, against the refund payable to the registered person. The proviso to this Rule provides that in cases where the amount of refund is completely adjusted against any outstanding demand under the Act or under any existing law, an order giving details of the adjustment shall be issued in Part A of FORM GST RFD-07.

Judgement of Kerala High Court

In SAJI S., PROPRIETOR, ADITHYA AND AMBADI TRADERS, RANJITH R., PROPRIETOR, RANJITH ROADLINES VERSUS THE COMMISSIONER, STATE GST,  THE ASSISTANT STATE TAX  OFFICER

2018 (11) TMI 954 - KERALA HIGH COURT, the petitioner had purchased certain goods from Tamil Nadu. While in transit of the said goods to Kerala the Authorities detained the goods  and  issued  a  demand  of  tax  to  the  petitioner. The consignor of the petitioner paid the tax under SGST along with the penalty based  on  the directions  of the Authority.   The petitioner showed to

the Authorities the receipt as evidence of tax and penalty. The Authorities, despite the payment, refused to release the goods on the ground that the petitioner had paid the tax under SGST instead of IGST. The petitioners requested the Authority to adjust the tax wrongly paid under SGST into IGST which was not taken into consideration. Aggrieved, the petitioners filed a writ petition before the High Court.

The petitioners contended that Section 77 of the Act read with Rule 4(1) of GST Refund Rules, 2017 allow the adjustment of GST paid under wrong head to the correct head. The Revenue contended that that the petitioner could as well pay the amount under 'IGST' and then claim a refund from the head 'SGST'. The Revenue further submitted that if the authorities have to go for an adjustment, it will take more than a couple of months.

The Hon’ble Kerala High Court after considering the submissions of both side, analyzed the provisions of law relied on by the petitioners and held that ssection 77 provides for the refund of the tax paid mistakenly under one head instead of another and Rule 4 speaks of adjustment. Where the amount of refund is completely adjusted against any outstanding demand under the Act, an order giving details of the adjustment is to be issued in Part A of FORM GST RFD-

07. The petitioner’s counsel laid stress on this process of adjustment and asserted that the amount remitted under one head can be adjusted under another head, for the demand can be any amount under the Act.

The High Court found no difficulty for the respondent officials to allow the petitioner's request and get the amount transferred from the head 'SGST' to 'IGST'. Although it may take some time as contended by the Government pleader, the court held that it is inequitable for the authorities to let the petitioner suffer on that count. The High Court directed the Revenue to release the goods forthwith along with the vehicle and, then, ensure that the tax and penalty already stood remitted under the 'SGST' is transferred to the head 'IGST'.

Note: Rule 4(1) of GST Refund Rules, 2017 seems to be inexistent. However, it is same as Rule 92 of CGST Rules, 2017 and maybe misquoted/reported in the decision.

TBM view

Therefore, if wrong tax has been collected and paid, the registered person has to pay the tax under the correct head and claim refund as per section 77 read with section 54. However, one can expect a time lag between the payment of the correct tax and issuance of the refund, especially in the initial years as there seems to be lack of procedural clarity about many aspects of refund among the officers.

Alternatively, Rule 92 prescribes for adjustment of taxes internally by the Department by creating a demand of tax under the correct head against the refund of wrong tax paid. The judgement of Kerala High Court also thrust the Department to adjust internally as there are express provisions in the GST law rather than to make it cumbersome for the tax payer.