Limitation under Section 54 CGST Act is Directory, Not Mandatory for Refund Claims Paid by Mistake: Karnataka High Court - 2025-11-07

Tax Refund Claims Not Tethered to Strict Timelines: Karnataka HC Rules on GST Error

In a significant ruling for taxpayers, the High Court of Karnataka has clarified that the two-year limitation period prescribed under Section 54 of the Central Goods and Services Tax (CGST) Act is "directory and not mandatory" when it comes to refund claims for tax paid under a mistake of law. Justice S.R. Krishna Kumar, presiding over a batch of writ petitions filed by M/s Merck Life Science Private Limited , set aside orders rejecting the company's refund claims, emphasizing that the state cannot unjustly enrich itself by retaining taxes collected without the authority of law.

The Dispute: A Mistake in Classification

M/s Merck Life Science Private Limited , a science and technology firm, had inadvertently paid Integrated Goods and Services Tax (IGST) on transactions between July and November 2017, mistakenly believing them to be inter-state supplies. Upon realizing the error, the company paid the correct state-specific GST (CGST and SGST) in March 2018.

The company subsequently filed for a refund of the erroneously paid IGST. However, the tax authorities rejected the applications, citing that the claims were filed beyond the two-year limitation period stipulated in Section 54 of the CGST Act. The department argued that the provision was mandatory and that any claims failing to meet this timeline were non-maintainable.

The Arguments: Rules vs. Restitution

The petitioner contended that the refund right stems from Section 19(1) of the IGST Act and Section 77(1) of the CGST Act, which are specific to "tax wrongfully collected." Counsel argued that Section 54 is merely a procedural pathway and that the principle of "unjust enrichment" prohibits the central authority from retaining taxes that the petitioner was not legally liable to pay, particularly when the correct tax had already been deposited with the State authorities.

The Union of India, represented through the Department of Revenue, maintained a rigid stance: that statutory limitation periods are absolute and that the authorities were merely following the prescribed mandate to avoid stale litigation.

Legal Analysis: The "Directory" Interpretation

The High Court drew inspiration from the principles of Articles 265 of the Constitution of India, which prohibits the collection of taxes without the authority of law. Relying on precedents like Lenovo (India) Pvt. Ltd v. Joint Commissioner of GST and the Andhra Pradesh High Court's decision in Louis Dreyfus Company Pvt. Ltd. v. Union of India , Justice Krishna Kumar observed that when a payment is made under a "mistake of law," the stringent timelines of Section 54 do not override the fundamental right of a taxpayer to recover money that the government has no right to hold.

The court notably distinguished between procedural compliance and substantive entitlement, concluding that the mechanical rejection of claims on grounds of limitation ignores the nature of the error.

Key Observations

• " Section 54 of the CGST Act and Rule 89(1A) of the CGST Rules, 2017 have been held to be directory and not mandatory."
• "Having regard to Article 265 of the Constitution of India, the respondent – Central GST authorities were not entitled to collect IGST from the petitioner, who was not liable to pay the same."
• "The respondent – Centre was not entitled to retain the IGST and consequently, by applying the principles of restitution and unjust enrichment, the respondent – Centre was obligated to refund IGST back to the petitioner."
• "The impugned orders passed by respondent No.3 holding that the refund claim is barred by limitation is contrary to facts and law."

The Verdict and Its Impact

The High Court has quashed the rejection orders and directed the authorities to process the refund applications on their merits. The tax department now has three months to re-evaluate the petitioner's claim, disregarding the expired limitation periods.

This ruling provides a major safeguard for businesses navigating the complex early compliance phases of the GST regime. By classifying the limitation period as directory, the court has ensured that procedural technicalities cannot act as a permanent barrier to justice when the underlying fiscal error is clear and undisputed. Taxpayers who have historically refrained from seeking refunds due to time-bar fears may now find a renewed legal avenue to recover funds erroneously deposited with the exchequer.