Background

1. The dual model of GST (i.e. CGST/SGST + IGST) coupled with the issues related to the identification of the correct place of supply can result in situations wherein the taxpayer ends up charging and paying the tax under an incorrect head (e.g. he may pay CGST/SGST where IGST was payable or vice-a-versa). Lawmakers were attuned to the said situation and hence created provisions contained u/s 77 of the CGST Act, 2017 or SGST Act, 2017 and Sec. 19 of the IGST Act, 2017. Said provisions in nutshell provides that the taxpayer can pay the tax under the correct head when it is held that the nature of supply (i.e. intra-state or inter-state) was initially determined incorrectly and claim a refund of the tax paid originally under the incorrect head. The said benevolent provisions also provide for complete relief from interest on such belated payments under the correct head that were earlier paid under the incorrect head.

Refund of GST Paid under Incorrect Head

Issues

2. However, the given provisions lead to several issues that require a resolution. Some of the issues are as under:

a. Whether the given provisions cover situations wherein the taxpayer has charged the tax in the tax invoice under the correct head but wrongly reported the same and paid the tax under the incorrect head?

b. What shall be the meaning of the term “subsequently held”? Will it cover only cases where the fact of payment under the incorrect head is determined by the officer or will it also cover cases where the said fact is determined by the taxpayer itself?

c. What shall be the period of limitation in making the refund claim? Will the statutory period of two years apply from the date of payment under the incorrect head or from the date of payment under the correct head?

d. What shall be the procedure to make the subsequent payment of the tax under the correct head?

e. What shall be the procedure to apply for the said refund?

f. What shall happen to the ITC availed by the recipient of the tax charged originally in the tax invoice under the incorrect head when the same is claimed as refund by the supplier owing to the subsequent payment of the tax under the correct head?

g. What shall happen to situations wherein tax credit notes have been issued to rectify such errors?

h. Whether the taxpayer can seek an auto-adjustment of the tax payable under the correct head against the refund receivable of the tax paid under the incorrect head?

3. Now Notification No. 35/2021 – Central Tax dt. 24.09.2021 as well as Circular No. 162/18/2021-GST dt. 25.09.2021 have been issued to resolve some of the aforesaid issues. Let us discuss the same issue-wise.

Situations covered u/s 77 of the CGST Act, 2017 or u/s 19 of the IGST Act, 2017

4. Sec. 77 of the CGST Act, 2017 or Sec. 19 of the IGST Act, 2017 applies to the situations wherein the taxpayer has made an incorrect determination of the nature of supply (i.e. intra-state or inter-state). Hence it cannot apply to situations wherein the taxpayer has made the correct determination of the nature of supply and reflected the correct tax in the tax invoice but failed to pay the tax under the correct head. Such taxpayers can take recourse to Circular No. 26/26/2017-GST dt. 29.12.2017 to adjust the incorrect tax in the subsequent return. Such a position can lead to the issue of whether interest can be levied on the delayed payment of tax under the correct head? It may be recollected that Sec. 77 of the CGST Act, 2017 or Sec. 19 of the IGST Act, 2017 grants relief in terms of the waiver of the interest (in the situation of incorrect determination of the nature of supply) on the premise that as the Government (State + Centre) has collected the tax (albeit under the wrong head), it cannot be said that there has been a failure to pay the tax and hence the relief from interest. We submit that even the present situation (though not expressly covered u/s 77 or u/s 19) deserves the same treatment as even herein the premise for granting the relief remains the same (i.e. the Government has realized the tax albeit under an incorrect head).

Meaning of the term “subsequently held”

5. Circular No. 162/18/2021-GST dt. 25.09.2021 at paragraph no. 3 has clarified that the term “subsequently held” u/s 77 of the CGST Act, 2017 or u/s 19 of the IGST Act, 2017 shall even cover situation wherein the taxpayer on suo motu basis subsequently finds (held) that the nature of supply was originally incorrectly determined and now is required to pay the tax under the correct head. We submit that the said view is the correct interpretation of such a beneficial provision.

Period of limitation in making the refund claim

6. Sec 54(1) of the CGST Act, 2017 provides that the person claiming a refund of any tax must make an application before the expiry of two years from the relevant date. The Explanation to the said provision defining the term “relevant date” failed to expressly consider the situations u/s 77 of the CGST Act, 2017 or u/s 19 of the IGST Act, 2017. On the other hand, the said Sec. 77 of the CGST Act, 2017 or u/s 19 of the IGST Act, 2017 provides that the refund of the tax paid under the incorrect head shall be granted “in such manner and subject to such conditions as may be prescribed”. Now in the exercise of the Rulemaking power u/s 164 of the CGST Act, 2017 read with the referred provisions, the Government has issued Notification No. 35/2021 – Central Tax dt. 24.09.2021 inserting sub-rule (1A) to Rule 89 of the CGST Rules, 2017 providing that the refund application is required to be made within a period of two years from the date of the subsequent payment of tax under the correct head. Further, the said sub-rule also provides that for the payments under the correct head made before 24.09.2021 (i.e. for the period prior to the insertion of the new sub-rule), the limitation period shall be two years from the date of effect of the new sub-rule. Hence for the refund claim based on the subsequent payment made under the correct head, if such payment was done before 24.09.2021, the refund application for the tax paid under the incorrect head can be filed till 23.09.2023. Again we shall submit that the insertion of the new sub-rule and providing the remedy even for the prior cases is the correct approach for such a beneficial provision. It may also be noted that even the pending refund cases are directed to be decided based on the aforesaid views.

Procedure to make the payment under the correct head

7. No clarity has yet been given on the procedure of making the payment under the correct head. We are of the view that the concerned taxpayer can issue a new tax invoice for reflecting and discharging the tax under the correct head. The same will also enable the recipient to avail the ITC of the tax subsequently paid under the correct head. Of course, due to the benefit available u/s 77 of the CGST Act, 2017 or u/s 19 of the IGST Act, 2017, no interest shall be leviable on the belated payment. Please also refer to the subsequent discussions related to ITC and on the issuance of the tax credit notes in such situations.

Procedure to apply for the refund

8. New sub-rule (1A) to Rule 89 of the CGST Rules, 2017 provides that the refund application is required to be filed electronically in FORM GST RFD-01 through the common portal.

9. It may however be noted that as per Rule 89(2)(j) of the CGST Rules, 2017 a statement showing the details of the transactions in question is required to be submitted along with the refund application. However, the said Rule 89(2) is required to be amended as the list of requirements specified therein is in the context of the refund application made under Rule 89(1) and not under the newly inserted Rule 89(1A). It may also be noted that in view of Sec. 54(8)(d) of the CGST Act, 2017 the aspect of unjust enrichment is not required to be fulfilled for such refund claims.

ITC availed by the recipient

10. The given clarifications fail to address the issue as regards the ITC availed by the recipient of the tax originally charged and paid under the incorrect head in the event wherein the tax is subsequently paid under the correct head and refund of the tax paid under the incorrect head is sought by the supplier and stands granted. It is a settled proposition that the ITC restrictions/reversals, if any, have to be expressly provided under the law. In absence of any express provisions, ITC restrictions/reversals cannot be inferred. However, in our opinion, a better view (despite no requirement to satisfy the test of unjust enrichment for claiming the refund) shall be to intimate the concerned recipient about the incorrect charge of tax on the invoice and subsequent payment of the tax under the correct head. The recipient can then reverse the ITC of the tax originally charged under the incorrect head and claimed as a refund by the supplier owing to subsequent payment under the correct head. Also as suggested earlier, the supplier can issue a fresh tax invoice reflecting the charge of the tax under the correct head and the recipient can avail of the ITC thereof. In our view the aspect of time limit for taking the ITC u/s 16(4) of the CGST Act, 2017 cannot hamper the claim as the said time limits are linked to the document date (i.e. the fresh invoice in the present situation).

11. An issue will also arise as regards the erroneous availment and utilization of the ITC under the incorrect head by the recipient and hence the consequential liability to pay interest. We are of the view that in such a situation the recipient can contend that he cannot be discriminated against the supplier (who enjoys the waiver of interest) and hence even in his case, in absence of any failure to pay the tax, there cannot be any liability to pay the interest.

Tax credit notes

12. It is possible that the concerned taxpayer might have detected the mistake (of incorrect determination of the nature of supply) within the time limits given under law to issue the tax credit notes. Hence such taxpayer may opt to adjust the tax charged and paid under the incorrect head by issuing the tax credit note and reversing the original invoice and subsequently issuing a fresh invoice reflecting the correct tax. In such a situation, whether the benefit in terms of waiver from interest shall be available u/s 77 of the CGST Act, 2017 or u/s 19 of the IGST Act, 2017 or not? Circular No. 162/18/2021-GST dt. 25.09.2021 clarifies that the refunds u/s 77 of the CGST Act / section 19 of the IGST Act would not be available where the taxpayer has made tax adjustment through the issuance of credit note under section 34 of the CGST Act in respect of the said transaction. Hence in view of the tax adjustment vide tax credit note, the question of claiming the refund generally will not arise (it may arise wherein in absence of adequate liability the taxpayer is not in a position to adjust the incorrect tax). However, we submit that as the given situation is covered u/s 77 of the CGST Act, 2017 or u/s 19 of the IGST Act, 2017 (as the said provisions only permit the refund claim and do not mandate it if the adjustment is permissible otherwise), the relief in terms of waiver of interest must also be extended even if the adjustment happens through a tax credit note.

Auto-adjustment

13. There can be a natural urge to ask the department to recover the liability of the tax to be paid under the correct head from the refund receivable under the incorrect head. This is because Sec. 79 of the CGST Act, 2017 permits the officer to recover the dues from the money owned to such person which is under the control of the department. However, it may be noted that the said view is possible only if the tax payable has been determined by way of passing of an order u/s 73 or 74 of the CGST Act, 2017 along with the passing of the refund order u/s 54 of the said Act. In absence of the same, it will not be possible to demand an auto-adjustment. Government should however consider the said route and provide for the necessary guidelines to creates further ease in such situations.

14. At the end of the day, it is just a question of transferring money from one Government head to another head. Who knew that such a simple act can lead to so many questions and their possible answers?

(Views are strictly personal)

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