Section 54(1) GST Refund Time Limit: Directory or Mandatory? Emerging Judicial Divide

Summary: Section 54 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) requires a refund application to be filed within two years of the relevant date, but whether this period is directory or mandatory remains unsettled. The article traces the emerging judicial divide across Madras, Gujarat, Andhra Pradesh, Jharkhand and Karnataka. The Madras High Court in Lenovo (India) Pvt. Ltd. and ARS Energy Pvt. Ltd. has leaned towards a directory interpretation, though Lenovo itself turned on a refund application filed within two years and its broader observation on limitation was obiter. Gujarat High Court in Comsol Energy and Andhra Pradesh High Court in Nspira Management Services have gone further in holding that Section 54 does not apply where tax was paid without authority of law. In BLA Infrastructure, the Supreme Court affirmed refund of a statutory pre-deposit on the narrower ground that Sections 107(6) and 115 govern such refunds, leaving the general Section 54(1) question open. In contrast, the Karnataka High Court Division Bench in Merck Life Science held the two-year period mandatory for the proper officer, while recognising the High Court’s Article 226 jurisdiction to condone delay subject to reciprocal extension of the officer’s limitation under Sections 73/74. The article compares these approaches and identifies practical categories: pre-deposit refunds, tax paid without authority of law and Section 77 situations are presented as directory or outside Section 54, while delayed refunds of exports, SEZ supplies and accumulated input tax credit remain subject to further deliberation. The article concludes that no single settled answer presently exists and that the result depends on the nature of the refund, facts and applicable jurisdiction.

Introduction

Section 54 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) requires a refund application to be filed within two years of the relevant date. A question that has now reached several High Courts, without a direct answer yet from the Supreme Court, is whether this two-year period is directory — capable of being relaxed in a deserving case — or mandatory, admitting of no exception save what the statute itself provides. Madras, Gujarat, Andhra Pradesh and Jharkhand High Courts have each, in different fact situations, leaned towards a taxpayer-favourable reading, while the Karnataka High Court’s Division Bench has recently taken the opposite view. This article traces that judicial trend, examines the reasoning in each decision, and sets out the practical scenarios in which the position may be treated as settled and those in which it remains open.

The Statutory Provision

Section 54(1) of the CGST Act, 2017 provides as follows:

“Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed.”

The word ‘may’ is the fulcrum of the entire debate. One line of authority reads it in its plain, enabling sense — as conferring a facility on the taxpayer rather than imposing a rigid restriction. The other reads legislative intent from the surrounding statutory scheme, in particular the three-year and five-year limitation periods prescribed under Sections 73 and 74 respectively for recovery proceedings, and concludes that Section 54(1) was deliberately calibrated against that scheme and is accordingly mandatory. Every judgment discussed below is, in substance, an argument for one or the other of these two readings.

The Directory View — Madras High Court

Lenovo (India) Pvt. Ltd. v. Joint Commissioner of GST (Appeals-1) – (2023) 12 Centax 230 (Mad.) / 2023 (79) G.S.T.L. 299 (Mad.) — decided 06.11.2023

Facts: The petitioner had claimed refund of IGST paid on supplies to SEZ units for the period December 2019 to February 2020. The application was filed within the two-year period, but was partly rejected on account of certain defects — namely, that the endorsement from the SEZ Authorised Officer had been obtained beyond 45 days, that supporting proof of delivery documents were filed only at the personal hearing and were treated as time-barred, and that there was a mismatch of endorsement dates in Statement-4.

Analysis/Rationale: The petitioner’s contention was that since the refund application itself was filed within the two-year period, any defect ought to have resulted only in a deficiency memo, and not an outright rejection, particularly where the delay in the SEZ officer’s endorsement was not attributable to the assessee. Reliance was also placed on Notification No. 13/2022-CT, which excludes the COVID period from 01.03.2020 to 28.02.2022 for limitation purposes. It was further contended that the word ‘may’ in Section 54(1) signals a directory, and not a mandatory, timeline.

Conclusion: The Madras High Court held that since the application was filed within two years, the question of a claim made beyond two years did not, strictly, arise on the facts. It nevertheless went on to observe that the two-year period under Section 54(1) is directory, and that an application filed beyond two years cannot, in appropriate cases, be rejected on that ground alone. It bears flagging that the decision itself turned on the narrower ground that a deficiency ought to trigger a deficiency memo rather than rejection; the Court did not undertake a detailed examination of the limitation question, and the observation on Section 54 being directory is, on a fair reading, obiter to the actual basis of the decision.

ARS Energy Pvt. Ltd. v. Additional Commissioner (Appeals), Chennai (2023) 13 Centax 300 (Mad.) — W.P. No. 17763 of 2020, decided 28.11.2023

Facts: The assessee had paid IGST on ocean freight charges under the reverse charge mechanism for December 2017 and January 2018. The refund claim, filed before the Supreme Court’s decision in Mohit Minerals, was rejected both on merits and on limitation.

Analysis/Rationale: Once the levy of IGST on ocean freight under reverse charge had been struck down by the Supreme Court, the petitioner contended it was entitled to refund of the amount paid, since double taxation on the same freight component could not be sustained.

Conclusion: The Madras High Court set aside the order rejecting the refund, holding the assessee entitled to refund as a matter of law. On the question of limitation, however, the Court did not undertake independent analysis; it expressly relied on its own ruling in Lenovo to hold that the two-year period under Section 54(1) is directory, and that the delay, being explained, was liable to be condoned.

Directory Because Section 54 Does Not Apply at All — Gujarat and Andhra Pradesh High Courts

Two further High Courts take the taxpayer-favourable position a step further, holding that a particular class of refunds falls outside the Section 54 limitation regime altogether, rather than merely being excused from it.

Comsol Energy Pvt. Ltd. v. State of Gujarat, R/SCA No. 11905 of 2020 (Guj.) — decided 21.12.2020

Facts and reasoning: IGST paid on ocean freight under reverse charge was claimed as refund beyond the two-year period prescribed under Section 54, following the Gujarat High Court’s own decision in Mohit Minerals striking down the levy. A deficiency memo was issued on the ground that the refund application was filed beyond the due date. The Gujarat High Court held that tax collected without authority of law, within the meaning of Article 265 of the Constitution, is not ‘tax’ at all, so that Section 54 has no application to its refund; such claims fall to be governed by the general Limitation Act, 1963, and not by the CGST Act’s two-year window.

Conclusion: The deficiency-memo rejection was set aside and the refund remanded for consideration on merits, the Section 54 limitation being held wholly inapplicable.

Nspira Management Services Pvt. Ltd. v. Asst./Dy. Commissioner, W.P. Nos. 18287 & 14905 of 2024 (AP) — decided 26.09.2025

Facts and reasoning: GST had been wrongly charged by landlords on a residential-rent supply that was in fact exempt. The refund claim, filed beyond the Section 54 window, was rejected through deficiency memos. Aligning itself expressly with Comsol Energy, the Andhra Pradesh High Court held that a mistaken payment on an exempt supply is not ‘tax due’ but a deposit made without authority of law under Article 265, so that Section 54 does not govern the claim and the Limitation Act, 1963 applies instead.

Conclusion: The deficiency memos were quashed, with the refund directed to be decided on merits without reference to the Section 54 limitation.

The common thread running through these two decisions is that Section 54’s two-year clock never starts running at all where tax has been paid without legal authority — a stronger, categorical carve-out than a mere finding that the provision is ‘directory’. In submissions on a refund filed beyond the statutory time-limit, it is important to keep this distinction sharp: a finding that the time-limit is directory means the time-limit applies but can be excused, whereas a finding of inapplicability means the time-limit was never triggered to begin with.

The Supreme Court Side-Steps the Question — BLA Infrastructure

BLA Infrastructure Pvt. Ltd. v. State of Jharkhand, Supreme Court of India, on appeal from the Jharkhand High Court

The issue before the Jharkhand High Court was whether refund of a pre-deposit could be allowed beyond the time-limit prescribed under Section 54. The High Court had held the Section 54(1) limitation to be directory, and accordingly allowed refund of the pre-deposit made under Section 107(1). On the Revenue’s appeal, the Supreme Court affirmed the refund, but on a materially narrower ground: it held that refund of a pre-deposit is governed by Section 107(6) read with Section 115 of the CGST Act, and that Section 54 has no application to such a refund at all. The Supreme Court accordingly held that the High Court’s exercise on the directory or mandatory character of Section 54 was unnecessary in that context.

Take-away: The Supreme Court has not, as things stand, ruled directly on whether the general two-year period under Section 54(1) — outside pre-deposit or Section 77 situations — is directory or mandatory. The question therefore remains genuinely open.

The Contrary View — Karnataka High Court, Division Bench

Assistant Commissioner of Central Taxes v. Merck Life Science Pvt. Ltd.,  (2026) 41 Centax 318 (Kar.) / 2026 (108) G.S.T.L. 323 (Kar.) — Writ Appeal Nos. 110 etc. of 2026, decided 17.03.2026

Facts: The assessee had paid IGST for October 2017 treating a supply as an export of services. In March 2018 it re-classified the same supply as an intra-State supply and paid CGST/SGST accordingly. Refund of the IGST already paid was claimed only on 30.03.2024 — by which date both the two-year window under Section 54(1) and the one-time window under the proviso to Rule 89(1A) (inserted with effect from 24.09.2021) had expired. The learned Single Judge had held the limit to be directory and allowed the claim; the Revenue appealed.

Analysis/Rationale: The Division Bench framed three questions for consideration: whether filing of an application within the time provided under Section 54 is mandatory; if so, whether the registered person is left without any remedy to claim a genuine refund; and what mechanism exists to condone delay in filing a refund application under Section 54. The Bench held that the two-year period under Section 54 is deliberately keyed to the three-year and five-year periods under Sections 73 and 74 — if a refund is examined and found to conceal a Section 73/74 situation, the officer must still be in a position to act. Treating Section 54 as merely directory, without a corresponding safeguard, would allow assessees to outrun Sections 73 and 74 altogether. The word ‘may’, the Bench held, is not invariably directory; its character depends on the statutory context in which it appears.

Conclusion: Section 54(1) was held to be mandatory as far as the proper officer is concerned — the officer has no departmental discretion to condone delay. However, the High Court, exercising jurisdiction under Article 226 of the Constitution, may condone the delay, subject to a matching, reciprocal extension of time being granted to the officer under Sections 73/74. On the facts, a delay of six months was condoned, with the claim to be processed as if it had been filed within time.

Where the Courts Stand — Comparative Summary

Practical Scenarios

Drawing on the judgments discussed above, the following scenarios may be regarded, on current authority, as clearly directory or inapplicable, while others require further deliberation and will depend on the facts and the jurisdiction concerned:

Scenarios where the time-limit is clearly directory or inapplicable

• Refund of a pre-deposit — the right to refund flows from Section 107(6) read with Section 115, and Section 54 does not apply at all.
• Tax paid without authority of law — the Article 265 argument that a refund of tax collected without legal sanction cannot be forfeited on a technical time-bar; for example, where a transaction is treated as taxable but subsequently held to be exempt or an export.
• Double payment or wrong-head payment, i.e. Section 77 situations — where Section 77 itself grants refund without any limitation, rejecting the claim solely under Section 54 would leave the statutory scheme incomplete (Merck, para 10.7).

Scenarios requiring further deliberation as to directory or mandatory character

• Refund of tax paid on exports or SEZ supplies, where the claim is not filed within the statutory timeline.
• Refund of accumulated input tax credit under Section 54(3), where the claim is not filed within the statutory timeline.
• Cases of genuine hardship — relief, if any, would have to come from the High Court under Article 226, and not from the proper officer, since even where Section 54 is held mandatory for the officer, the High Court can condone delay in writ jurisdiction where entitlement is otherwise undisputed (Merck), subject to a reciprocal extension of time being granted for action under Sections 73/74.

As a matter of practice, it may also be worthwhile for practitioners to periodically review clients’ electronic credit ledger balances to understand the reasons for accumulation, and to examine whether a case exists for filing a refund claim even beyond the statutory time-limit, having regard to the judicial trend discussed above.

Conclusion

The question of whether the two-year period under Section 54(1) is directory or mandatory does not, at present, admit of a single, settled answer. Four High Courts — Madras, Gujarat, Andhra Pradesh and, on the pre-deposit question, Jharkhand — have leaned towards a directory reading, or have held Section 54 inapplicable altogether to particular classes of refund, while the Karnataka High Court’s Division Bench in Merck has taken the contrary view that the period is mandatory for the proper officer, relievable only by a writ court and subject to a reciprocal extension of the officer’s own limitation.

Each of these positions rests on a coherent reading of the statute — one emphasising the plain, enabling sense of ‘may’ and the hardship of defeating genuine claims on a technical time-bar, the other emphasising the calibrated relationship between Section 54 and the recovery periods under Sections 73/74. Neither can, on the present state of authority, be said to be clearly correct or clearly incorrect, and this article does not purport to resolve that debate. What can be said with confidence is that the answer will, for the present, differ by jurisdiction, that the outcome in any given case will turn closely on the nature of the refund claimed and the facts giving rise to the delay, and that the position is likely to remain fluid until the Supreme Court has occasion to pronounce directly on the general question. Taxpayers and their advisers would accordingly be well served by assessing each case on its own facts, against the precedent applicable in the relevant jurisdiction, rather than proceeding on an assumption that either reading has been conclusively settled.