1.Introduction

GST being a new law and the concept of dual GST being a completely new concept, it was found in the initial phase of GST implementation that many taxpayers and professionals alike struggled to identify the correct nature of supply. As a result, the taxpayers classified certain transactions as intra-State supplies when, in fact, they should have been classified as inter-State supplies and vice-versa.

To deal with such situation, section 77 of the CGST Act, 2017 and section 19 of the IGST Act, 2017 cumulatively provide as follows:

  • Where any registered person has paid CGST & SGST on a transaction considering it to be intra-State supply, but which is subsequently held to be an inter-State supply, then such person is required to pay IGST on such supply (without paying any interest for the delay in payment of IGST) and claim a refund of the CGST & SGST paid incorrectly.
  • Where a registered person has paid IGST on a transaction considering it to be an inter-State supply, but which is subsequently held to be an intra-State supply, then such person is required to pay CGST & SGST on such supply (without paying any interest for the delay in payment of CGST & SGST) and claim a refund of the IGST paid incorrectly.

In a nutshell, in case of payment of tax under incorrect head (IGST/CGST/SGST/UTGST) there is no provision for inter-head offset and the taxpayer must pay the tax under the correct head and claim refund of the tax paid under the incorrect head.

3d rendering GST Tax India with percentage

In a case[1], where the taxpayer had correctly reported the nature of supplies as inter-State in his GSTR-1 but had inadvertently paid tax under the head CGST instead of IGST while filing his GSTR-3B, the Jharkhand High Court held that he could not be saddled with liability to pay interest on such amount.

Sec. 54 of the Act provides for a time limit within which any refund application can be filed. The time limit is two years from the relevant date. Relevant date, in this case, is the date of payment of tax.

A lot of ambiguity prevailed regarding refund of tax paid under incorrect head, with different interpretations in relation to the meaning of the term ‘relevant date’, applicability of section 54 to the refund as per section 77, non-provision of the prescribed manner for claiming refund of incorrect tax, etc.

2. Ambiguity in the interpretation of the term “subsequently held” and clarification thereof

The term “subsequently held” used in sec. 77 of the CGST Act and sec. 19 of the IGST Act was interpreted by many to mean that only where a supply made a taxpayer as intra-State or inter-State, is subsequently held by the tax authorities as inter-State or intra-State respectively, either on scrutiny/ assessment/ audit/ investigation, or as a result of any adjudication, or at the time appellate proceedings, then the refund of incorrect tax paid by the taxpayer may be claimed by him. In view of this interpretation, a taxpayer who had paid the tax under incorrect head and later paid the tax under correct head upon self-realisation of the mistake in determining the nature of supply could not claim the refund of the tax paid under incorrect head.

To fill the lacuna in the aforesaid interpretation, CBIC has issued Circular No. 162/18/2021-GST, dated September 25, 2021 to clarify that the term “subsequently held” in sec. 77 of the CGST Act or sec. 19 of the IGST Act covers both the cases where the inter-State or intra-State supply made by a taxpayer, is either found by the taxpayer himself as intra-State or inter-State supply respectively or where the same is subsequently found or held by the tax officer in any proceeding. Accordingly, refund of tax paid under incorrect head can be claimed by the taxpayer in both cases, provided that he pays the tax under the correct head.

3. Ambiguity regarding non-provision of prescribed manner as per sec. 77 and interpretation of ‘relevant date’

An argument was made that since the ‘manner and conditions for refund’ as provided for in sec. 77 of the CGST Act and sec. 19 of the IGST Act was not prescribed, the said sections were inoperative.

To fill the lacuna, Notification No. 35/2021-Central Tax, dated 24-09-2021 has been issued whereby sub-rule (1A) to rule 89 of the CGST Rules, 2017 has been inserted w.e.f. 24-09-2021 to prescribe the manner of claiming refund under section 77 of the CGST Act. The sub-rule provides that any person claiming refund of tax paid under incorrect head may file a refund application electronically in FORM GST RFD-01 before the expiry of period of two years from the date of payment of tax under the correct head.

Apart from putting the controversy of non-provision of prescribed manner to rest, sub-rule (1A) has resolved the major issue wherein relevant date was interpreted to be the date of payment of tax under incorrect head and refund applications were rejected for want of limitation. Now the taxpayer may claim refund of tax paid under incorrect head within two years from the date of payment of tax under correct head.

But what about the refund of tax paid under incorrect head in case of taxpayers who have already paid the tax under correct head and two years have already elapsed since such payment? To address this issue a proviso has been inserted to sub-rule (1A) if rule 89 to provide that in such cases, refund application may be filed within two years from the date on which the said sub-rule comes into force, i.e., on or before 23-09-2023.

4. Illustration with scenarios

Circular No. 162/18/2021-GST, dated September 25, 2021 has given the following illustration with different scenarios for further clarity:

Taxpayer ‘A’ issued invoice dated 10-03-2018 charging CGST & SGST on a transaction and accordingly paid the tax in the return for March 2018.

S.No. Scenario Last date for filing refund claim
1 Having realised on his own that the said transaction is an inter-State supply, ‘A’ paid IGST in respect of the said transaction on 10.05.2021. Since ‘A’ has paid the tax in the correct head before issuance of Notification No. 35/2021-Central Tax, dated 24-09-2021, the last date for filing refund application in FORM GST RFD-01 would be 23.09.2023 (two years from date of notification)
2 Having realised on his own that the said transaction is an inter-State supply, ‘A’ paid IGST in respect of the said transaction on 10.11.2021 i.e. after issuance of Notification No. 35/2021-Central Tax, dated 24-09-2021 Since ‘A’ has paid the correct tax on 10.11.2021, in terms of rule 89 (1A) of the CGST Rules, the last date for filing refund application in FORM GST RFD-01 would be 09.11.2023 (two years from the date of payment of tax under the correct head, i.e. IGST)
3 Proper officer or adjudication authority or appellate authority of ‘A’ has held the transaction as an inter-State supply and accordingly, ‘A’ has paid the IGST in respect of the said transaction on 10.05.2019 Since ‘A’ has paid the tax in the correct head before issuance of Notification No. 35/2021-Central Tax, dated 24-09-20211, the last date for filing refund application in FORM GST RFD-01 would be 23.09.2023 (two years from date of notification)
4 Proper officer or adjudication authority or appellate authority of ‘A’ has held the transaction as an inter-State supply and accordingly, ‘A’ has paid the IGST in respect of the said transaction on 10.11.2022 i.e. after issuance of Notification No. 35/2021-Central Tax, dated 24-09-2021 Since ‘A’ has paid the correct tax on 10.11.2021, in terms of rule 89 (1A) of the CGST Rules, the last date for filing refund application in FORM GST RFD-01 would be 09.11.2023 (two years from the date of payment of tax under the correct head, i.e. IGST)

5. The aforesaid Circular further clarifies as follows:

    • Rule 89(1A) of the CGST Rules equally applies to section 19 of the IGST Act, where the taxpayer has initially paid IGST on a transaction which is subsequently held to be an intra-State supply (by the taxpayer himself or by the tax authorities) and the taxpayer pays CGST and SGST on the said transaction.
    • Any refund applications filed, whether pending or disposed off, before insertion of sub-rule (1A) to rule 89 of the CGST Rules, shall be dealt with in accordance with the provisions of the said sub-rule.
    • Refund under sec. 77 of the CGST Act or sec. 19 of the IGST Act would not be available where the taxpayer has made tax adjustment through issuance of credit note u/s 34 of the CGST Act in respect of the said transaction.

6. Parting remarks

There are many cases of payment of tax under incorrect head due to misclassification of nature of supply by the taxpayers, especially in the initial phase of implementation of the GST law. Many such cases were identified at the time of conduct of GST audits by the professionals. Many more may come to light during the departmental audits for F.Y. 2017-18 & F.Y. 2018-19 now being undertaken by the authorities u/s 65 of the Act.

Since the GST law does not provide for revision of returns and there is no scope for inter-head adjustment of taxes paid, a lot of taxpayers were under undue stress of losing out on taxes paid under incorrect head owing to bona fide misclassification or were staring at a long drawn litigation to get back the amounts. Insertion of sub-clause (1A) to rule 89 and issuance of Circular No. 162/18/2021-GST, dated September 25, 2021 has provided much need clarity and relief to all such taxpayers.

Since Circular No. 162/18/2021-GST, dated September 25, 2021 clarifies that any refund applications disposed off before issuance of Notification No. 35/2021-Central Tax, dated 24-09-2021 shall be dealt with in accordance with the provisions of rule 89(1A), it is recommended that such taxpayers approach their jurisdictional officers.

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[1] Shree Nanak Ferro Alloys (P.) Ltd. v. UOI [2020] 35 GSTL 393 (Jharkhand) [18-12-2019]

Author Bio

Qualification: CA in Practice
Company: Aditya Surte & Co.
Location: Mumbai, Maharashtra, India
Member Since: 15 Sep 2021 | Total Posts: 2
New-age Chartered Accountant having a strong foundation of sales tax laws and involved in research based practice providing consultancy, assurance, litigation and compliance services aimed at adding value to the client's business. Believer in the importance of a good work ethic and attention to deta View Full Profile

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