[Analysis] Liability to pay Interest on the amounts erroneously refunded

Rahul S Jain & Balaji Sai Krishnan – [2022] 140 taxmann.com 550 (Article)

1. Introduction

There has been an increasing trend of litigation in respect of refunds already sanctioned due to consequent change in position of law (for Inverted duty structure on input services), the decision of the Hon’ble Supreme Court in Union of India v. VKC footsteps India (P.) Ltd. and the multiple amendments to Rule 96(10) of the CGST Rules, 2017. In such cases, the Department has started initiating proceedings to recover the erroneous refunds sanctioned to the assessee.

However, there were no Rule or form prescribing for the manner of re-credit of the amounts debited in the Electronic Credit ledger during the initial sanction of the refund. To address this challenge, Rule 86 (4B) has been inserted in the CGST Act, 2017.

The said Rule provides for re-crediting of the amount of erroneous refund to the electronic credit ledger, where such demand against the erroneous refund is paid in cash through DRC -03. The re-credit will be made to an assessee by an order in Form GST PMT 03 A.
The condition in Rule 86(4B) also requires the assessee to deposit such refund along with interest and penalty.

Further, the Board vide Circular No. 174/06/2022-GST dated 06.07.2022 had clarified that re-credit of the amount in the electronic credit ledger can be done once the taxpayer deposits the erroneously refunded amount along with interest and penalty.

In light of this background, the authors in the present article intend to explore whether interest is required to be paid at all in the first place for any case involving erroneous refunds.

Relevant Provisions

Section 50 of the CGST Act is the substantial provision prevailing for the scenarios where interest liability gets triggered. The Section provides for payment of interest in two circumstances:-

1. Where a person liable to pay the tax fails to pay the tax. (Section 50(1) of the CGST Act, 2017.
2. Where the input tax credit has been wrongly availed and utilised. (Section 50(3) of the CGST Act, 2017.

To summarize, section 50 of the CGST Act, 2017 contemplates levy of interest only in cases of short-payment or non-payment of tax and in cases when the input tax credit was wrongly availed and utilised by the taxpayer.

The Section is a complete code in itself in so far as applicability of interest is concerned and there are no further provisions in the CGST Act attracting the levy of interest.

Further, Rule 88B has been inserted with retrospective effect from 01.07.2017 providing for the manner in which interest is to be calculated for delayed payment of tax. The Rule prescribes three scenarios where interest liability gets triggered. These are

(a) Delayed filing of returns
(b) Tax not paid for any other reason
(c) ITC wrongly availed and utilized

The Rules also do not prescribe any manner of calculating interest for recovery of erroneous refunds which are made to an assessee.

Having discussed the relevant provisions in the Act and the Rules pertaining to levy and calculation of interest, it is also important to highlight the provisions relating to recovery of erroneously granted refund.

Section 73 of the CGST Act, 2017 contains the machinery provision empowering the department to demand erroneously sanctioned refund.

For the sake of convenience, the relevant portions of section 73 of the CGST Act, 2017 is reproduced:-

“Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any wilful-misstatement or suppression of facts.

73. (1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.”

Click Here To Read The Full Article