GST Paid Wrongly Because of Intra- vs Inter-State Misclassification: Challenges & Measures

Wrongful Payment of GST Due to Incorrect Classification of Intra-State and Inter-State Supply: Challenges and Corrective Measures

Introduction

In the GST regime, correctly determining whether a supply is intra-State or inter-State is essential, as it decides the applicability of Central and State/Union Territory taxes (CGST + SGST/UTGST) or Integrated Tax (IGST). Misclassifying a supply can lead to payment under the wrong tax head, causing compliance complications, blocking working capital, and potentially create disputes with the tax authorities. Recognizing that such errors can occur despite of due diligence, the law provides relief under Section 77 of the CGST Act, 2017, and Section 19 of the IGST Act, 2017, allowing taxpayers to claim refunds for taxes paid incorrectly once the supply is properly reclassified. Circular No. 162/18/2021-GST further clarifies the refund procedure, limitation periods, and relief from interest liability, ensuring that genuine mistakes in classification do not result in undue financial penalties.

Section 77 of the Central Goods and Services Tax (CGST) Act, 2017

If a registered person has paid Central Tax and State Tax (or Central Tax and Union Territory Tax) on a transaction that was considered to be an intra-State supply but is later determined to be an inter-State supply, the person shall be entitled to a refund of the taxes paid.

Section 19 of the Integrated Goods and Services Tax (IGST) Act, 2017

Where a registered person has paid Integrated Tax (IGST) on a supply which was considered to be an inter-State supply, but is later determined to be an intra-State supply, such person shall be entitled to a refund of the Integrated Tax so paid.

In both of above cases where a registered person has incorrectly classified a supply as either intra-State or inter-State and has accordingly paid the wrong type of tax, the section provides relief from interest liability upon correction of such classification. Specifically, if a registered person has paid Central Tax and State Tax (or Union Territory Tax) on a transaction treated as an intra-State supply, which is later held to be an inter-State supply, they shall not be required to pay any interest on the Integrated Tax (IGST) payable due to such reclassification. Similarly, if a registered person has paid IGST on a transaction considered to be an inter-State supply, which is subsequently determined to be an intra-State supply, no interest shall be levied on the Central Tax and State Tax (or Union Territory Tax) payable as a result. This provision ensures that bona fide classification errors do not attract penal interest, provided the correct tax is eventually discharged.

Circular No. 162/18/2021-GST dated 25 September, 2021

The said Circular provides clarifications with respect to the interpretation and implementation of the above provisions. Key clarifications include :-

• Refund Allowed Only After Correct Tax is Paid 

The taxpayer is eligible for a refund of the tax wrongly paid (whether CGST + SGST/UTGST or IGST), where the supply is subsequently reclassified. Such a refund is subject to the condition that the correct type of tax is eventually paid upon such reclassification.

• No Interest on Correct Tax –No interest liability shall arise on the correct tax payable, provided the incorrect tax was already paid in good faith and the misclassification was not due to fraud or suppression.
• Time Limit for Refund – Two Years

Refund applications must be filed within two years from the date of payment of correct tax (not the date of original incorrect payment).

This clarification is crucial, as earlier there was confusion whether the limitation period should start from the date of original tax payment or the date when the error was rectified.

Summary of Refund Application Timelines Under Rule 89(1A)

**(6) In rule 89 of the said rules

(ii) after sub-rule (1), the following sub-rule shall be inserted, namely:- “(1A) Any person, claiming refund under section 77 of the Act 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, may, before the expiry of a period of two years from the date of payment of the tax on the inter-State supply, file an application electronically in FORM GST RFD-01 through the common portal, either directly or through a Facilitation Centre notified by the Commissioner:

Provided that the said application may, as regard to any payment of tax on inter-State supply before coming into force of this sub-rule, be filed before the expiry of a period of two years from the date on which this sub-rule comes into force.”;

Conclusion

Sections 77 of the CGST Act and 19 of the IGST Act, along with the clarifications issued through Circular No. 162/18/2021-GST, provide a mechanism for rectifying tax paid under a mistaken understanding of the nature of a supply (intra-State vs inter-State). These provisions ensure that genuine errors in classification do not result in financial penalties such as interest, while enabling the taxpayer to recover the wrongly paid tax through a refund process, subject to prescribed conditions.