HC holds two-year period of limitation for claiming refund of wrongly paid tax is not mandatory

 This Tax Alert summarizes a recent ruling^[1] of the Karnataka High Court (HC) on whether the two-year time limit prescribed under Section 54 of the Central Goods and Services Tax Act, 2017 (CGST Act) is mandatory or directory.

The assessee provided intermediary services to foreign entities and paid integrated tax (IGST) on the same during the period July to November 2017, considering it as export. Later, it realized the services were intra-state supplies and paid appropriate tax in March 2018. It then filed a refund application on 30 March 2024 for refund of IGST paid earlier, which was rejected on the grounds that it was time-barred under Section 54 of the CGST Act r/w Rule 89(1A) of the Central Goods and Services Tax Rules, 2017 (CGST Rules).

The key observations of the HC are:

• Section 19(1) of the Integrated Goods and Services Tax Act, 2017 (IGST Act) provides that if IGST paid on a supply considered by a taxpayer to be an inter-state supply is subsequently held to be an intra-state supply, such taxpayer shall be granted refund of the amount of IGST paid.
  
  
  
• Madras HC in case of Lenovo India Pvt. Ltd.^[2] and Andhra Pradesh HC in case of Nspira Management Services Pvt. Ltd.^[3] have held that the time limit prescribed under section 54 and Rule 89(1A) are directory and not mandatory.
  
  
  
• Under Article 265 of the Constitution, the Central GST authorities were not entitled to collect IGST from the petitioner, who was not liable to pay it. Once the petitioner paid the correct tax to the State authorities, the Centre could not retain the wrongly paid IGST and, applying the principles of restitution and unjust enrichment, was required to refund it.

Accordingly, HC held that the refund claim is within time limit and is not barred by limitation. Consequently, it remitted the matter back to the department to pass appropriate order on merits.

Comments:

• The ruling is likely to help taxpayers seeking refund beyond the period of two years in cases involving wrong payment of tax.
  
  
  
• Businesses may have to evaluate whether the observation of the HC that time limit prescribed under Section 54 is not mandatory can apply to refund in other cases as well.
  
  
  
• It remains to be seen whether Revenue files an appeal against this ruling before the Supreme Court.
  
  
  
• AP HC in case of Nspira Management Services had earlier dealt with delayed refund application filed by taxpayer for tax wrongly paid on supply which was exempt.