GST Refund claim where tax is paid under wrong head

1. Introduction

GST is a destination-based tax. The provisions of place of supply play an important role while determining the taxable jurisdiction i.e., the State which gets the right to collect tax. However, there can be some instances where a taxpayer may wrongly consider a transaction as intra-state supply instead of inter-state supply or vice-versa and pay tax under the wrong head.

In cases, where tax paid under the wrong head is utilized against the tax liability (i.e. return has been filed), the assessee would be required[1] to pay tax under the correct head and it can claim refund of tax paid under wrong head. Recently, the CGST Rules have been amended[2] to provide the manner and time limit for claiming the refund in such cases. Further, a clarification[3] has also been issued by the CBIC in this regard.

In this write-up, we have discussed the above Notification and clarification issued by the Government.

2. Relevant provisions under the GST Laws

Section 77 of the CGST Act, 2017 provides that the registered person who has paid CGST and SGST/ UTGST, as the case maybe, on a transaction considered by him to be an intra-state supply, but which is subsequently held to be an inter-State supply, would be refunded the amount of taxes paid in the manner prescribed. Similarly, Section 19 of the IGST Act, 2017 provides for the refund of IGST where taxpayer considered intra-State supply to be an inter-State supply. Notably, no interest^[4] is levied on the payment of tax as there is no loss to Government Revenue.

Rule 89 of the CGST Rules, 2017 provides the manner of refund of tax. The person who has paid excess tax is required[5] to file the refund application under Form GST RFD-01 within 2 years from the relevant date[6] i.e. date of payment of tax.

3. Amendment introduced under relevant provisions

New sub-rule[7] has been inserted under Rule 89 vide Central Goods and Services Tax (Eighth Amendment) Rules, 2021, providing the time limit to avail the refund of tax paid under wrong head under Section 77 w.e.f. September 24, 2021.

It is now provided that the person claiming refund under Section 77 of any tax paid by him, in respect of a transaction considered by him to be an intra-state supply, which is subsequently held to be an inter-state supply, is required to file refund application in Form GST RFD-01 before the expiry of period of two years from the date of payment of the tax on the inter-state supply.

It is also provided that the said application is required to be filed before the expiry of a period of two years from the date on which this sub-rule comes into force where any payment of tax on inter-State supply is made before coming into force of this sub-rule.

4. Impact of the amendment

Earlier, there were doubts relating to the time limit within which refund is required to be filed where the tax has been paid under the wrong head. In order to remove the ambiguity, the amendment would provide relief to the taxable person, as now, he would be able to file the refund application within 2 years from the date of payment of tax under the correct head.

Further, in cases where the payment under the correct head is made before the amendment Notification, the taxable person can file the refund claim within 2 years from the date of such Notification which is September 24, 2021. Therefore, the refund can be applied in such cases before September 23, 2023.

5. Clarification on the interpretation issues

• • Various doubts were raised on the interpretation of the term ‘subsequently held’, that whether refund claim would be available where the payment made under the wrong hand is subsequently found by the tax officers or would also include the scenarios where it is subsequently found by taxpayer himself. The CBIC has clarified vide Circular No. 162/18/2021-GST, Dated September 25, 2021, that the refund would be available in both the given cases
  • The amendment introduced through CGST (Eighth Amendment) Rules, 2021 provides for refund claim under Section 77. However, amendment does not specifically mentions the cases covered under Section 19. In this regard, the CBIC has clarified that the Rule 89 (1A) would be applicable for Section 19 also, where the taxpayer has initially paid IGST on a specific transaction which later on is held as intra-state supply and the taxpayer accordingly pays CGST and SGST on the said transaction
  • It is further clarified by the CBIC that Rule 89(1A) would also be applicable for any refund applications filed before issuance of impugned Notification, whether it is pending or disposed off
  • Cases where tax paid under the wrong head is adjusted by way of issuing credit note under Section 34 of the CGST Act and later on re-issuing the tax invoice by charging tax under the correct head, the CBIC has clarified that the refund under Section 77 or Section 19 would not be available in such cases
  • The CBIC has also provided treatment under various scenarios which has been summarized below:

[1] Section 77 of the CGST Act, 2017 read with Rule 89 of the CGST Rules, 2017

[2] Sub-rule 1A inserted in Rule 89 of the CGST Rules, 2017 vide Notification No. 35/2021 – Central Tax, Dated September 24, 2021

[3] Circular No. 162/18/2021-GST, Dated September 25, 2021

[4] Section 77(2) of the CGST Act

[5] Section 54 of the CGST Act, 2017

[6] Explanation 2(h) of Section 54 of the CGST Act, 2017

[7] Rule 89(1A) of the CGST Rules, 2017