I. Introduction
As Adam Smith famously observed, a just system of taxation must be designed to take out of the pockets of the people as little as possible beyond what legitimately accrues to the public treasury, a principle that remains central to modern refund regimes. In contemporary tax regimes, tax refund mechanisms are the means through which this principle is operationalised by returning the amount collected without legal justification. In India’s Goods and Services Tax regime, refunds can be claimed for various reasons such as exports, deemed exports etc. The timely refund mechanism is essential for working capital, modernisation, expansion and other business expenses. Section 54 of the Central Goods and Services Tax (“CGST”) Act, 2017 contains the provision pertaining to the refunds under GST with Section 54(11) providing for temporary withholding of Refunds where the refund order is challenged or other proceedings are pending and Commissioner is of the opinion that releasing refund would adversely impact the revenue interest. The High Courts have repeatedly examined the scope and limit of statutory power to withhold GST refund, However, the CGST Act is structurally silent on what follows after withholding, thereby shifting the burden of resolving post withholding disputes onto the Courts, the resultant effect being that litigation persist. In this article, a case is made up for a time-bound, review-based and proportional post-withholding framework.
Keywords: CGST Act 2017, GST Litigation, Withholding of GST Refund, Indirect Tax
II. Legal Architecture of Withholding and Release of Refunds under Section 54(10) and 54(11) of CGST Act
Under Section 54 of CGST Act, any claim for refund needs to be filed before the expiry of two years from the relevant date, defined for different categories of refunds in the explanation to Section 54. The exact procedure to file differsdepending on the situation leading to refund claim; however, a common roadmap involves the registered person filing electronic refund application along with document on the official GST Portal or notified facilitation centre in Form GST RFD-01 in accordance with the Rule 89 of the CGST Rules, 2017 and the claim is processed by the officer of tax authority with jurisdiction. If the officer finds the claim valid, then the refund order is passed within 60 days and in case of any delay, interest becomes payable.
Crucially, the application of refund is not automatically payable upon processing. Section 54(10) empowers the proper officer to withhold payment of refund or deduct the refund due, tax, penalty etc. which the person is liable to pay under CGST Act or under existing law. However, where such withholding is set aside and a refund is granted by an appellant or adjudicatory order, Section 54(10) stands displaced.
In such circumstances, any further withholding of refund can only be done under Section 54(11), which permits the withholding of refunds, after giving the opportunity of being heard to the taxable person, upon satisfaction of two condition; (i) when the order itself which direct the refund is subject matter of proceeding which is pending in appeal or any other proceedings; and (ii) the Commissioner is of the opinion that granting of such refund would adversely affect the revenue on account of malfeasance or fraud committed. The stringent conditions under Section 54(11) are designed as an exceptional measure to protect the revenue interest and is distinct from the routine mechanism for withholding provided under Section 54(10). The Courts have repeatedly highlighted, such as Delhi High Court in G.S. Industries vs Commissioner CGST Delhi West, Shalendra Kumar vs Commissioner Delhi West CGST Commissionerate , both of the above conditions need to be satisfied to withhold refund and in absence of any challenge to the Appellate order, the refund has to be granted; The Department cannot withhold the refund on the ground of mere intention to file an appeal rather than actual appeal within 60 days of the order.
Thus, the adverse opinion of Commissioner on refund under Section 54(11) renders the entire exercise of Adjudication insignificant and the reasoned order of the said authority retains no value. The power to commission is of discretionary nature and upon the
However, the problem lies in the fact that the provision does not prescribe any outer time limit for continued withholding once an order directing refund is subjected to appeal or “other proceedings”. This Prolonged withholding of legitimately due tax refunds negatively impact business especially they can have a disproportionate and damaging impact on micro, small and medium enterprises (MSMEs), which typically operate with thin working-capital buffers and limited access to alternate credit.
III. The Proposed Post-Withholding Framework
The statutory framework of CGST Act is, as of now, concerned with the power and interest on funds withheld by the proper officer under Section 54(10) when the application is filed and the withholding after an Appellant authority decides again that initial withholding. The proposed framework is devised to address the post-withholding phase of GST Refunds under Section 54(11) of CGST Act. In the current regime, the phase suffers from indeterminate procedural pendency and while the Act authorises the withholding of funds under limited circumstances, it still does not prescribe any structured framework governing the continuation, review, proportionality, or termination of such withholding.
The resultant effect of it being that withholding, which is intended as temporary revenue-protective measure, often translate into indefinite holding of taxpayer’s refunds if Courts do not intervene. The fact that interest is not paid to the taxpayer for the time period the case was under consideration by Appellate authority further strengthen the need for a structured post-withholding framework based on the principles of natural justice and administrative fairness.
These uncertainties warrant a uniform framework through mechanism such as Central Board of Indirect Taxes and Customs (“CBIC”) Circular to impose legally and commercially viable procedural direction that would balance the revenue interest and prevent Section 54(11) to become a licence for indefinite withholding. The current mechanism only necessitates on the reasoned order for initial withholding; However, there exist no requirement to revisit the initial decision and by relying on that initial order alone, the withholding could be continued for months or years even as officers get transferred, evidence weakened and investigation stalls, the refund stays withheld.
A mechanism could be devised where a timeframe is prescribed for initial investigation for refund that is withheld by order under Section 54(11) and is a subject matter of investigation. However, following the expiration of that timelines, the withholding need to authorised again periodically after certain period of time, ideally 90 days, by higher authority such as Principal Commissioner. Whilst reauthorising, the nexus between refund and investigation must be re-established along with sharing material prima facie indication fraud or malfeasance. It must also explain the reasons on why withholding is still necessary and recording progress of investigation. The progress would be shared with the taxpayer ensuring transparency in executive action. This mechanism would ensure that the even after the initial stage, the reasoned order for withholding is provided periodically at different stage of proceedings.
Another aspect of withholding under Section 54(11) is their binary nature in most of the case, there could only be two possibilities either of complete refund is withheld or released. While Rule 91 and 02 of CGST Rules, 2017 and CBIC Circular 125/44/2019-GST does recognise provisional and partial release of funds, its generic nature, whilst not excluding Section 54(11) from its preview, leads to it being seldomly exercised in the cases of fraud or malfeasance. The circular could impose a duty on the proper officer to consider partial release and to justify why full withholding is necessary whenever reauthorisation is sought and if the condition does not persist to justify withholding entire fund, a proportional amount must be released to the taxpayer.
The proposed framework does not concern with the stage when the case is under Judicial scrutiny but only when it is being held back by the GST authorities on the basis of pending investigations or other departmental proceedings. It addresses the prolonged executive withholding of GST Refunds and how a balance between revenue interest and malfeasance could be achieved.
IV. Conclusion:
The problem of refund stagnation under Section 54(11) does not arises from the legislative silence on timelines, but from the absence of procedural and proportional safeguards. The solution therefore lies not in blanket timelines that could jeopardise the purpose of the section itself but in introducing review-based, transparent and accountable mechanism for executive that civilise administration discretion without diluting investigative power of the Department.
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Authored by: 1. Anand Singh [3rd Year B.A., LL.B. (Hons.) student at Institute of Law, Nirma University
Author 2: Chayank Bohra Jain, Advocate, Bombay High Court
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