GST refund for tax wrongly paid under an incorrect head must be claimed within two years from the date of payment under the correct head, not from the date of the original erroneous payment.

Taxonation | 31 Jul, 2025

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Introduction

In a significant judgment addressing procedural rigidity versus legislative intent under the Goods and Services Tax (GST) regime, the High Court has delivered a verdict that reaffirms the taxpayer’s right to a refund when tax is wrongfully paid under an incorrect head. The case revolved around whether the rejection of a refund application, citing limitation under Section 54 of the CGST/BGST Act, 2017, was legally sustainable when Section 77 and associated rules and circulars applied.

Background of the Case

The petitioner had originally paid ?5,08,194 in January 2018 under the CGST and SGST heads for certain transactions. However, an audit under Section 65 of the BGST/CGST Act later clarified that the transactions were inter-state, not intra-state. This led to the petitioner paying IGST via Form DRC-03 on March 4, 2023.

Subsequently, a refund claim was filed on January 17, 2024, for the earlier wrongly paid CGST and SGST. Despite this being within two years of the corrected IGST payment (as per Section 77 and Rule 89(1A)), the tax authorities rejected the refund citing Section 54 limitation, which generally allows two years from the date of original payment.

Reliefs Sought by the Petitioner

The petitioner prayed for the following:

Quashing of the refund rejection order dated 06.05.2024.
Declaration that Section 77 (and not Section 54) governs the case.
Acknowledgment of the refund eligibility based on the correct interpretation of law and CBIC Circular No. 162/18/2021-GST.
Direction for refund of CGST and SGST wrongly paid, with interest and litigation costs.

Submissions by the Petitioner

Refund within limitation: The refund application was filed within 2 years from the correct tax payment (IGST) on 04.03.2023 as required by Rule 89(1A).
CBIC Circular No. 162/18/2021-GST clarifies that the limitation starts from the date of payment of tax under the correct head.
The rejection based on Section 54 was erroneous as Section 77 specifically deals with tax paid under the wrong head, i.e., intra-state instead of inter-state.
Cited Gajraj Vahan Pvt. Ltd. vs. State of Jharkhand (2023), where a similar refund was allowed.

Stand of the State

The learned State Counsel submitted:

Section 54 mandates a strict two-year limitation from the original date of tax payment.
Since the CGST and SGST were paid in January 2018 and the refund was filed in January 2024, the application was time-barred.

Court’s Observations

Section 77 of the CGST/BGST Act clearly deals with situations where the tax was wrongly paid under an incorrect head.
Rule 89(1A) prescribes that the limitation period begins from the date of payment under the correct head, which in this case was 04.03.2023.
The CBIC Circular confirms this interpretation and binds the tax authorities.
The department's rejection without considering Section 77 and the circular renders its action legally flawed and contrary to legislative intent.

Final Judgment

The High Court:

Allowed the writ petition and quashed the refund rejection order.
Ordered refund of ?5,08,194 (CGST + SGST) to the petitioner.
Directed payment of interest at 6% p.a., starting 3 months after the refund application date till actual refund.
Imposed litigation cost of ?10,000 on the State.