Summary: Unauthorized collection of GST is prohibited under the constitutional and statutory framework governing taxation in India. Article 265 of the Constitution provides that no tax shall be levied or collected except by authority of law, while the CGST Act, 2017 contains specific provisions addressing collection of tax without authority and requiring collected amounts to be deposited with the Government. Section 76 mandates payment of amounts collected as representing tax irrespective of whether the underlying supply is taxable, with proceedings involving notice, determination, interest and recovery. Section 122 contains penal consequences for specified instances of tax collection and non-payment, while the composition scheme under Section 10 restricts composition taxpayers from collecting GST from recipients. In practice, unauthorized collection may arise where unregistered sellers charge GST, composition dealers add GST to customer bills, or registered taxpayers collect amounts exceeding the applicable statutory rate. The article also examines the doctrine of unjust enrichment and refers to the Supreme Court decisions in R.S. Joshi, Sales Tax Officer v. Ajit Mills Ltd. and Mafatlal Industries Ltd. v. Union of India. Practical difficulties discussed include identifying and refunding unauthorized collections to B2C consumers, consequences for B2B recipients facing ITC-related issues, and litigation concerning informal descriptions such as “GST extra”. The article concludes by discussing enforcement gaps and suggestions including billing-system validation, reporting mechanisms, recovery against defaulting suppliers, transparency concerning Consumer Welfare Fund utilisation and consumer awareness initiatives.
Introduction
Imagine buying a coffee at a small neighborhood cafe and noticing a 18% GST line item added to your bill. But when you look closely at the receipt, there is no GSTIN listed or worse, a quick search reveals the vendor isn’t even registered under GST. Where does that extra money go? In many cases, it goes straight into the vendor’s pocket.
This simple scenario highlights a major issue in indirect taxation: unauthorized collection of tax. Under India’s Central Goods and Services Tax (CGST) Act, 2017, the law is crystal clear no person can collect tax unless authorized by law. Yet, from unregistered shopkeepers charging tax to composition dealers illegally passing on tax burdens, unauthorized collection remains a common compliance challenge.
Despite this explicit prohibition, unauthorized collection of tax remains a recurring compliance issue under the Indian Indirect Tax regime. It manifests primarily when unregistered entities charge GST on invoices, when composition dealers unlawfully collect tax from recipients, or when registered taxpayers collect tax in excess of prescribed statutory rates. Unauthorized tax collection distorts tax compliance, compromises public trust, and generates illicit gains at the expense of end consumers and the public exchequer. Addressing this issue requires analyzing the statutory, administrative, and constitutional mechanisms designed to prohibit unauthorized collection under GST law.
Legal Framework
Constitutional Foundation
The constitutional mandate prohibiting unauthorized collection originates from Article 265 of the Constitution of India, which mandates:
“No tax shall be levied or collected except by authority of law.”
This constitutional imperative dictates that any extraction of money designated as “tax” without explicit statutory backing is unconstitutional, invalid, and subject to mandatory restitution.
Statutory under the CGST Act, 2017
Section 76(1) — Mandatory Deposit of Collected Amounts: Any person who collects an amount representing “tax” under the CGST Act must immediately deposit that amount with the Central Government. Crucially, this obligation applies regardless of whether the underlying supply was legally taxable.
- Section 76(2) to (6) — Recovery and Determination Mechanics: Where amounts collected as tax are not deposited, tax authorities issue a Show Cause Notice (SCN). After providing a reasonable opportunity of being heard, officers determine the amount due under Section 76(5) and collect it along with mandatory interest under Section 50.
- Section 122(1)(iii) & (iv) — Penal Provisions: Imposes a penalty equivalent to the tax amount (or ₹10,000, whichever is higher) on any taxable person who collects tax but fails to pay it to the Government beyond three months from the due date, or collects tax in direct contravention of the Act.
- Section 10(2)(a) & (d) — Restrictions on Composition Dealers: Expressly prohibits taxpayers opting for the Composition Scheme from collecting any GST from their buyers or issuing tax invoices.
Contemporary & Practical Analysis
To see how this works in practice, let’s look at three common real-world scenarios:
- Scenario A: Unregistered Sellers
A local electronics seller without a GST registration issues a hand-written cash memo charging 18% GST. Since they have no GSTIN, they cannot deposit this money on the GST portal. Under Section 76, the tax department can step in, demand the collected amount, and slap a 100% penalty on the vendor under Section 122.
- Scenario B: Composition Dealers Charging GST
Composition taxpayers pay a flat tax (e.g., 1%) directly out of their revenue. However, some small retailers mistakenly or deliberately add a tax line-item to customer receipts. Because Section 10 bans this, the dealer must surrender every penny of that collected tax to the state under Section 76.
- Scenario C: Applying the Wrong Tax Rate
A business sells essential food items taxed at 5% but accidentally bills customers at 12%. The extra 7% collected isn’t extra profit it must be handed over to the government unless corrected via a credit note.
Judicial Precedents & Legal Doctrines
The enforcement of Section 76 rests on the equitable principle against unjust enrichment. In R.S. Joshi, Sales Tax Officer v. Ajit Mills Ltd. (1977), the Supreme Court ruled that statutory provisions penalizing or forfeiting unauthorized tax collections are valid constitutional measures. The Court noted that allowing a dealer to retain amounts collected under the pretext of tax would amount to sanctioning unjust enrichment at the cost of the public.
In Mafatlal Industries Ltd. v. Union of India (1997), a Constitutional Bench of the Supreme Court affirmed that any tax collected without authority of law must either be refunded to the person who ultimately bore the financial burden or credited to a designated state welfare fund.
Critical Discussion
While the legal principles underlying Section 76 are clear, practical implementation presents several operational challenges:
- Section 76(9) provides that surplus amounts collected illegally must be refunded to the buyer who bore the burden, or credited to the Consumer Welfare Fund. In retail (B2C) transactions, tracing individual shoppers to return small amounts of unauthorized tax is practically impossible. As a result, these sums are routinely absorbed into the Consumer Welfare Fund rather than returned to the affected consumers.
- In B2B transactions, if a buyer pays tax in good faith to an unregistered or defaulting supplier, tax authorities often deny Input Tax Credit (ITC) to the buyer under Section 16(2)(aa)/(c). Consequently, the innocent buyer is penalized by losing ITC, while administrative proceedings under Section 76 against the defaulting supplier remain pending.
- Small retail vendors frequently use informal terminology (such as “plus tax” or “GST extra”) on non-standard receipts without issuing a valid tax invoice. Establishing whether these receipts constitute formal collection of tax under Section 76 often leads to protracted litigation.
Conclusion
The strict statutory prohibition against unauthorized tax collection serves as an indispensable constitutional check within India’s modern indirect tax regime. Under the CGST Act, 2017, Section 76 reinforces the fundamental principle of Article 265 of the Indian Constitution—that no tax may be collected except by explicit authority of law—by preventing businesses from unjustly enriching themselves under the pretext of tax compliance. While the legal architecture is robust in theory, its practical effectiveness depends heavily on closing enforcement gaps, protecting end consumers from hidden price markups, and ensuring that innocent B2B buyers are not unfairly penalized for a supplier’s non-compliance. Bridging these operational gaps is essential to upholding market fairness and maintaining long-term confidence in the GST framework.
Suggestions
- Mandatory API-level validation should be built into commercial point-of-sale billing systems to automatically cross-verify taxpayer registration status on the GSTN portal, instantly blocking unregistered merchants or composition dealers from generating invoices with tax line-items.
- The Central Board of Indirect Taxes and Customs (CBIC) should launch an intuitive “Report Fake GST” feature within the official GST app, enabling retail buyers to instantly upload suspicious receipts and trigger automated compliance notices to defaulting vendors.
- Administrative guidelines should explicitly instruct field officers to exhaust statutory recovery measures against the defaulting seller under Section 76 before attempting to recover or block Input Tax Credit (ITC) from a compliant B2B recipient under Section 16.
- The government should implement a transparent digital tracking system to report how funds collected under Section 76(9) are utilized within the Consumer Welfare Fund, ensuring that unrefundableB2C collections directly finance public consumer-protection initiatives.
- The tax administration should launch nationwide consumer literacy programs—particularly targeting small retail markets—to help the public identify valid GSTINs, understand composition scheme limitations, and recognize illegal tax charges on everyday receipts.
