30-Mar-2023 Payment of GST under wrong head- Consequences and Solutionsgst refund input-tax-credit
This blog discusses the consequences of paying tax under the wrong head and the constitutional validity of Section 19 of the IGST Act and Section 77 of the CGST Act in India. It explains that if tax is paid under the wrong head, then the taxes paid under the wrong head will be refunded, and tax liability under the correct head will be payable without any levy of interest and penalty. The article also provides an action point for suppliers and the impact on recipients/customers where the supplier collects and pays the tax under the wrong head. The author concludes that both sections do pass the test of constitutional validity.
Recently a writ petition has been filed in Rajasthan High Court challenging the constitutional validity of Section 19 of the IGST Act along with Section 77 of the CGST Act. Both these sections deal with:
- a. Consequences of payment of tax under the wrong head i.e. intra-state/inter-state or CGST+SGST paid instead of IGST or vice versa.
b. Payment under the correct head of tax
- c. Refund of tax paid under the wrong head.
1. The petition is listed for further hearing after 6 weeks. As an interim measure, the petitioner has been directed to pay tax under the correct head and claim refund of the tax paid under the wrong head. Against this backdrop let us analyze the subject of the consequences of the payment of tax under the wrong head.
2. Both section 19 of the IGST Act and Section 77 of CGST Act lay down that if CGST+SGST /IGST is paid on a particular transaction of supply and subsequently it is held that CGST+SGST was payable instead of IGST or vice versa then taxes paid under the wrong head will be refunded and tax liability under the correct head will be payable without any levy of interest and penalty.
3. As per Rule 89 of CGST Rules, such refund of tax paid under the wrong head can be claimed within 2 years from the date of payment of tax under the correct head.
4. Now coming to the constitutional validity of these sections, the author is of the firm view that both sections do pass the test of constitutional validity due to:
- a. Express provisions regarding the type of levy and taxable events as laid down in the charging sections of each Statute i.e. Section 9 of CGST Act/SGST Act and Section 5 of IGST Act.
b. CGST/SGST Act levies tax on intrastate transactions while IGST Act levies tax on inter-state transactions.
c. Nature of transaction i.e. whether interstate/Intra state depends upon two factors which are the place of supply and location of the supplier.
d. As a thumb rule, if the location of the supplier and place of supply are in the same state, it is intra state transaction liable to CGST+SGST
e. If the location of the supplier and place of supply are in two different states (in the case of domestic transactions), it is an interstate transaction liable to IGST.
f. In the case where the location of supplier and place of supply are in two different countries, it is always interstate transaction liable for IGST.
Refund of tax paid under wrong head:
5. The taxpayer will always be entitled to refund of tax paid under the wrong head irrespective of existence of said sections on statute books. The reason is Article 265 and Article 300A of the Constitution which lay down that no tax can be collected/no person can be deprived of his property except under the authority of law. This principle is applicable across all statutes in force in India.
6. On the other hand, by insertion of said sections (Section 19 and Section 77) along with amendment in Rule 89 laying down limitation period for refund of tax paid under the wrong head which is 2 years from the date of payment of tax under the correct head ,the period of 3 years which is otherwise available under the Limitation Act,1963 has been sought to be curtailed.
This limitation period of 2 years laid down by Rule 89 will not withstand the test of judicial scrutiny reason being amount paid under wrong head is not GST at all hence limitation period laid down under GST Law will not be applicable.
Action point for suppliers
7. In case you have paid the tax under the wrong head as a supplier, take an instant action to pay the tax under the correct head and claim refund of the tax already paid the under the wrong head. This will avoid unnecessary notices/litigation.
8. If you have forgotten to claim refund of tax paid under the wrong head within 2 years from the date of payment of tax under the correct head, you can always file refund claim within 3 years from the said payment of tax under the correct head taking into consideration the provisions of the Limitation Act,1963, if the amount of refund involved is substantial.
Impact on recipient/Customer where supplier collects and pays the tax under the wrong head
9. The input tax credit is available under GST only on satisfaction of conditions laid down in Section 16 read with Section 17 of the CGST Act.
Here one must note that when the supplier collects the tax under the wrong head, it is not GST/tax at all hence question of the input tax credit does not arise.
Remedy/Solution for recipient/Customer
a. Verify whether tax paid by the supplier is under the correct head or not i.e. CGST+SGST or IGST on regular basis.
b. In case, it is found to be collected under the wrong head, immediately contact the supplier and get a credit note from him. It will be a credit note issued u/s 34.
c. Please note that the time available for this exercise is up to the due date of GSTR-1 for October of the next financial year or till the filing of the annual return by the supplier, whichever is earlier.
d. In spite of the above time limit, it is advisable to take action instantly on receipt of the invoice so as to avoid payment of interest+ penalty on account of wrong availment of ITC.
e. It should also be noted that the correct availment of ITC is the whole responsibility of therecipient.
f. If this mistake by the supplier is found after the 30th of November of the next financial year or after filing of GSTR-3B by the recipient for the month of October of the next financial year, consequences will be:
g. The ITC of tax charged under the wrong head will be denied along with consequential penalty+ interest during the department proceedings. If reversal of wrong availment of ITC is done by the recipient voluntarily or within 30 days of the issue of Show Cause Notice by the department, only interest needs to be paid.
h. Recipient will not be able to claim ITC on the basis of corrected invoice, if any, given by the supplier due to the provision of Section 16(4) of CGST Act.
i. The only remedy available will be issuing a commercial debit note to the supplier.
- j. Definitely penalty+ interest will not be levied if ITC so claimed was not utilized.
k. Morale is the earlier the better.
When tax is charged correctly but disclosed under wrong head while filing GSTR-1 and also paid under wrong head while filing GSTR-3B
Remedies available to the supplier
a. If this mistake is brought to the notice of supplier within time available for amendment in GSTR-1 already filed which is 30th November of next financial year, same may be corrected and tax may be paid under correct head. Refund of amount paid under wrong head can always be claimed.
b. Here question may arise as to whether this case is covered by Section 77 of CGST Act/Section 19 of IGST Act ? These sections envisage the mistakes on account of charging as well as paying tax under wrong head due to mistake in application of Sections 10 to 13 of IGST Act. But in the case under consideration, we are envisaging collection/charge under correct head but payment under wrong head.
c. It should be noted that even though this case is not covered by Section 77/Section 19, supplier will not be liable to payment of any interest u/s 50(1) of CGST Act and penalty u/s 122/125/127/any punishment u/s 132 of CGST Act because The government was not deprived of its legitimate revenue after the due date for payment of tax. Supplier was not benefited, by any stretch of imagination, due to payment of tax under wrong head No mens rea or intention to evade the tax is present.
d. Supplier can make the payment of tax under correct head and can claim refund of tax paid under wrong head in accordance with provisions of the Constitution elaborated above and Provisions of the Limitations Act, 1963. Remedies to the recipient
1. Since tax charged in invoice and tax shown in GSTR-2A/2B are not matching, recipient will be denied ITC.
2. Remedies available to the recipient are same as elaborated in para 10.