A GST notice alleging that tax was paid under the wrong head—IGST instead of CGST and SGST, or CGST and SGST instead of IGST—raises a procedural error rather than a substantive short payment, provided the correct amount was paid. Section 77 of the CGST Act and Section 19 of the IGST Act provide the mechanism for adjustment or refund. The Karnataka High Court has held that the department ought to directly adjust the tax already paid instead of requiring the taxpayer to first pay under the correct head and thereafter seek a refund.
The Section 77 Mechanism
Section 77(1) applies where a taxpayer paid CGST and SGST on a transaction considered intra-state but later held to be inter-state. Section 77(2) applies where the taxpayer paid IGST on a transaction considered inter-state but later held to be intra-state. In either case, the taxpayer must pay the correct tax and can then claim a refund of the tax wrongly paid. The Circular No. 162/18/2021 provides the procedure for the refund claim.
The Adjustment-First Ruling
The Karnataka High Court has held that where GST was paid under the wrong head, the department should adjust the tax already paid against the correct liability rather than requiring a fresh payment followed by a refund. The Court relied on Section 77(2) read with Rule 92 and observed that a bona fide wrong-head payment does not automatically trigger a fresh liability for tax, interest or penalty. The taxpayer should invoke this ruling in the reply and request adjustment.
The Correct-Payment Evidence
The reply should include the invoice-wise place-of-supply analysis, the returns showing the tax paid under the wrong head, the computation of the correct head and the amount, and the request for adjustment. Where the department insists on the refund route, the taxpayer should file the refund claim with the correct-payment proof and should claim interest on the delayed refund if applicable.
The Limitation and Interest
The refund route under Section 77 has its own limitation and procedure. The Kerala High Court has held that the two-year limitation for a Section 77 refund runs from the date of the correct payment. The taxpayer should file within the limitation and should document the correct payment date.
What the Taxpayer Should Control
The wrong-head outcome depends on three variables: whether the correct amount was paid under the wrong head; whether the reply invokes Section 77 and the adjustment-first ruling; and whether the correct-payment evidence and the refund claim (if required) are filed within the limitation. The taxpayer that controls these variables avoids a duplicate tax liability on a procedural error.
Call to Action: We advise taxpayers on wrong-head payment notices, Section 77 adjustments and refund claims. For a wrong-head review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.