Tax Vista Your weekly tax recap Edn. 284 - 6th July 2026 Kasi Viswanathan V

 

 

Wrong Tax Head: Adjustment or Refund?

Payment under the wrong tax head continues to generate litigation despite the statute providing a remedy. The prescribed mechanism appears more suited to facilitating settlement between Governments than to providing a simple correction process for taxpayers.

 

The dispute arose after the taxpayer had discharged IGST on supplies subsequently found to be intra-State by audit authorities. A demand under section 73(9) was confirmed and the statutory appeal was dismissed on the ground of delay. The refund claim for the IGST was rejected supposedly because the refund of IGST was filed with CGST/KGST authorities. The petitioner submitted that in terms of section 77(2) and Rule 92, IGST paid should be adjusted against CGST/KGST and only if there is shortfall, demand of tax and interest can be made. Reliance was placed on Hon'ble Kerala High Court decision in Saji S [2018-VIL-508-KER].

 

Faced with this situation, the High Court examined section 77(2) and found that when integrated tax is paid by registered person on a transaction considered by him to be an interstate supply but which is subsequently held to be an intra-state supply, registered person shall not be required to pay either the interest or tax. Reading the provision conjointly with Rule 92 in the manner adopted by the Kerala High Court in Saji, Hon'ble Karnataka High Court held that the petitioner could not be fastened with liability towards tax, interest or penalty and remitted the matter for fresh consideration in the light of the proposition laid down by the Kerala High Court, which it chose to follow.

 

The decision is, in my view, best understood in the backdrop of recovery proceedings under Form GST DRC-13. It is perhaps for this reason that the Court found it appropriate to examine the possibility of adjustment instead of viewing the refund & demand proceedings in isolation, though not expressly stated. Circular No.162/18/2021-GST was not brought to attention of Hon'ble Court. The circular continues to envisage payment under the correct head followed by refund of the tax wrongly paid. Here, however, recovery had already reached the stage of DRC-13 proceedings, therefore examining the possibility of adjustment was an appropriate course.

 

A couple of aspects merit a closer look. First, while section 77(2) expressly grants relief from interest, the observation regarding penalty does not appear to flow from the provision itself and should be viewed in the factual context of the case. Secondly, the Kerala High Court decision, on which the present ruling rests, was rendered in the context of detention of goods in transit and taxes were paid to secure release of goods, which is different from other regular cases. It also deserves mention that the proviso to Rule 92 has since been omitted, the adjustment, whether whole or part, now reflected in Form GST RFD-06 instead of Form GST RFD-07.

 

Strictly speaking, Rule 92 contemplates a situation where refund is due and payable and is adjusted against an outstanding demand. In that sense, where recovery proceedings have already commenced, there is sufficient justification to expand the scope of Rule 92 and permit adjustment instead of insisting on the refund route. However, this should not be understood as displacing the procedure contemplated in Circular No. 162/18/2021-GST for ordinary cases of wrong-head payment. These line of decisions do not replace the statutory refund mechanism, but comes to rescue where there is recovery action even after tax is paid (albeit under wrong head) [2026-VIL-643-KAR].

 

Transition Credit: Was Section 142 the Issue?

The issue before the High Court appears concise but raises an important question on the interplay between transitional provisions and the GST refund mechanism. More importantly, it prompts a closer look at whether the refund claim was examined under the correct statutory framework.

 

The petitioner had transitioned VAT input tax credit of Rs.23.75 lakh into the GST regime by filing TRAN-1 under Section 140. Consequently, the amount formed part of the electronic credit ledger. During the period from 1 July 2017 to 31 March 2018, the accumulated input tax credit stood at Rs.28.54 lakh, against which a refund of Rs.23.50 lakh was claimed under section 54(3). The Department sanctioned only Rs.4.75 lakh and rejected the balance claim of Rs.18.75 lakh on the ground that it represented transitioned credit, which could not be refunded in view of the second proviso to section 142(3).

 

The High Court accepted the Department's stand. It held that section 49(6), read with section 54, contemplates refund only of credit accumulated under the GST regime and not credit originating under the erstwhile laws. It is further observed that in terms of second proviso to section 142(3), once a taxpayer chooses to transition the accumulated credit into GST, the option of claiming refund stands foreclosed with the taxpayer retaining only the right to utilise the transitioned credit. In arriving at this conclusion, the Court relied upon paragraph 10 of Circular No.37/11/2018-GST, which explains the operation of section 142(3), (4) and (5).

 

Although the Court also found that reasoning for rejection was not formally communicated and no opportunity of hearing had been granted under Rule 92 before rejecting the refund claim, it declined to remand the matter, holding that the controversy was purely legal and that a remand would be an empty formality. It, however, left it open to the petitioner to seek re-credit under Rule 93.

 

The denial of an opportunity of hearing and the absence of proper communication of reasons deserve serious consideration. While the Court considered the remand to be empty formality in the facts of the case, the procedural safeguards built into Rule 92 perhaps deserved greater emphasis.

 

Be that as it may, coming to the principal issue, with due respect, the refund was not claimed for the VAT credit of Rs.23.75 lakh as such. That credit had already transitioned into GST under section 140 and formed part of the closing balance in the electronic credit ledger. The refund claim was under section 54(3) in respect of that closing balance. Therefore, invoking section 142(3) and its second proviso may not have been the appropriate starting point.

 

Section 142 comes into play where refund is claimed under the existing law. It is also worth remembering that not every State VAT law permitted refund of unadjusted input tax credit. The Gujarat VAT rules did permit such refund under Rule 15. It is only where the earlier law itself envisaged refund that a choice between claiming refund under the existing law and transitioning the credit into GST truly arises, and it is that choice which the second proviso to section 142(3) seeks to regulate.

 

The claim in the present case was under section 54(3), with the closing balance in the electronic credit ledger admittedly comprising transitioned credit as well. The more relevant enquiry, therefore, was whether such transitioned credit formed part of the refundable closing balance. That issue is governed by section 54(3) read with Rule 89.

 

Interestingly, while the Court relied upon paragraph 10 of Circular No.37/11/2018-GST dealing with section 142, paragraph 8 of the very same circular may have provided a more direct indication of the Department's understanding. It clarifies that transitional credit is not input tax credit availed 'during the relevant period' for the purposes of the refund formula under Rule 89 (5). The enquiry, therefore, ought to have been whether transitioned credit could be regarded as Net ITC under Rule 89(5).

 

The reliance on section 49(6) also, with respect, appears open to debate. The provision refers to refund of the balance remaining in the electronic credit ledger after discharge of amounts payable under the GST Acts. The expression "under this Act" qualifies the amounts payable that are adjusted against the balance. It does not qualify the balance itself, which by then already forms part of the electronic credit ledger under the GST Acts. It does not distinguish that balance based on the source from which the credit originated. Whether transitional credit forming part of the closing balance in electronic credit ledger, is refundable is therefore a question that may more appropriately fall for determination under section 54 and Rule 89 rather than section 142(3).

 

Viewed thus, section 142 may not have been the real issue. The real controversy lay in section 54 and Rule 89, where the Revenue has already expressed its understanding in paragraph 8 of Circular No. 37/11/2018-GST. Whether that understanding correctly reflects the statutory scheme is, however, a question that still remains open for judicial consideration. [2026-VIL-636-GUJ]

 

[Read previous edition dated 13.04.2026]

 

(The views expressed are personal. The author can be reached for feedback or queries on v.k.vishwa@gmail.com)