Tax Wrongfully Collected and Paid to Central or State Government – Section 77 of GST

Under the GST regime, tax classification plays a crucial role in determining the correct nature of a supply — whether it is intra-State or inter-State. However, genuine errors may occur, especially in the initial stages of GST implementation, leading to wrongful tax payments. To address such situations, Section 77 of the CGST Act, 2017 provides relief for registered taxpayers who have wrongly classified a supply and paid taxes under an incorrect head.

This provision ensures that taxpayers are not penalized for unintentional mistakes and can claim refunds or get relief from interest liability in specific scenarios. Let’s delve deeper into the details of Section 77 and its implications.

What is Section 77 of the CGST Act?

Section 77 of the CGST Act, 2017 deals with cases where tax has been paid incorrectly due to misclassification of a supply — whether as intra-State or inter-State.

Sub-Section (1) – Refund in Case of Wrong Classification as Intra-State Supply

If a registered person treats a supply as intra-State and pays CGST + SGST/UTGST, but the supply is later held to be inter-State, requiring IGST payment instead, then:

• The taxpayer is entitled to a refund of the CGST and SGST/UTGST wrongly paid.

• The refund is subject to prescribed manner and conditions, as notified under the GST rules.

Sub-Section (2) – No Interest on Payment When Supply Reclassified as Intra-State

In cases where a registered person treats a supply as inter-State and pays IGST, but the supply is later held to be intra-State, requiring CGST + SGST/UTGST payment:

• The taxpayer is not liable to pay interest on the amount of CGST and SGST/UTGST to be paid.

• This provides substantial relief, especially when such errors occur due to lack of clarity.

Purpose of Section 77

The primary objective of Section 77 is to protect taxpayers from undue hardship when a genuine error is made in determining the nature of supply. Since GST law is complex and the distinction between intra-State and inter-State supplies can sometimes be confusing, this provision aims to:

• Ensure fairness in tax administration.

• Allow correction of classification errors without harsh penalties.

• Encourage compliance by reducing the fear of punitive action for bona fide mistakes.

Effective Date

Section 77 of the CGST Act has been in force since 1st July 2017, the date of GST implementation across India.

Relevant Rule: Rule 89(1A) of the CGST Rules

To operationalize Section 77(1), Rule 89(1A) was introduced, which lays down the procedure for claiming refunds of tax paid under the wrong head.

As per Rule 89(1A):

• A registered person who has paid CGST and SGST/UTGST on a transaction subsequently held to be an inter-State supply can file a refund application in Form GST RFD-01.

• The refund must be claimed within two years from the date of payment of IGST.

• If the IGST payment was made before the date of insertion of Rule 89(1A) (i.e., 24th September 2021), the time limit of two years starts from 24th September 2021.

Example Scenarios

Scenario 1: Misclassified as Intra-State Supply

• A supplier in Maharashtra sells goods to a registered buyer in Gujarat but treats the supply as intra-State due to incorrect interpretation.

• The supplier pays CGST and Maharashtra SGST.

• Later, the transaction is held to be inter-State, and IGST should have been paid.

• The supplier can now claim a refund of CGST and SGST under Section 77(1) and Rule 89(1A).

Scenario 2: Misclassified as Inter-State Supply

• A supplier in Delhi sells goods to a buyer in Delhi but erroneously treats it as inter-State and pays IGST.

• Upon reassessment, the supply is held to be intra-State, and CGST + Delhi SGST is payable.

• The supplier pays CGST and SGST, but is not liable to pay interest on the delayed payment, as per Section 77(2).

Key Points to Remember

• Refunds are available only for tax paid under the wrong head, not for the correct tax paid later.

• The taxpayer must ensure accurate documentation and evidence to support the nature of supply.

• Time limits for refund applications are strictly enforced.

• Relief under Section 77 does not absolve the taxpayer from paying the correct tax, only provides remedies for the mistaken payment.

Conclusion

Section 77 of the CGST Act is a vital taxpayer-friendly provision that acknowledges the complexity of GST and offers relief in case of genuine errors in tax classification. It allows for refunds and waives off interest in certain scenarios, promoting ease of doing business and voluntary compliance.

Businesses and tax professionals must stay updated with the GST rules and make use of the remedies available under Section 77 when appropriate.

FAQs

Q1. Can I get a refund if I paid CGST and SGST but the supply was inter-State?
Yes, you can claim a refund of CGST and SGST under Section 77(1), subject to conditions and time limits.

Q2. Do I have to pay interest if I paid IGST but the supply was intra-State?
No, under Section 77(2), interest is not payable on CGST and SGST if the supply was mistakenly treated as inter-State.

Q3. What is the time limit to file a refund under Section 77?
Refund must be claimed within 2 years from the date of payment of the correct tax (IGST in this case). Special rule applies for payments made before 24th September 2021.