Unjust Enrichment in GST Refunds: Practical Evidence for Passing/Not Passing Incidence
The application of the Doctrine of Unjust Enrichment in India was authoritatively settled by the landmark nine-judge Supreme Court judgment in Mafatlal Industries Ltd. v. Union of India (1997).
The application of the Doctrine of Unjust Enrichment in India was authoritatively settled by the landmark nine-judge Supreme Court judgment in Mafatlal Industries Ltd. v. Union of India (1997). The Goods and Services Tax (GST) framework in India provides mechanisms for refunding excess tax paid in specific circumstances, such as exports, inverted duty structures, or wrong tax payments. But...
The application of the Doctrine of Unjust Enrichment in India was authoritatively settled by the landmark nine-judge Supreme Court judgment in Mafatlal Industries Ltd. v. Union of India (1997).
The Goods and Services Tax (GST) framework in India provides mechanisms for refunding excess tax paid in specific circumstances, such as exports, inverted duty structures, or wrong tax payments. But refund claims are subject to a critical safeguard: the doctrine of Unjust Enrichment.
This doctrine ensures that taxpayers do not receive refunds for taxes they have already passed on to consumers. In other words, the government prevents double benefit, first by collecting tax from the consumer and then refunding it to the supplier.
Doctrine of Unjust Enrichment
The doctrine of unjust enrichment is a keystone of indirect taxation; it is particularly important in the context of refund claims under GST. Its purpose is to ensure that no person gains an undue advantage at the expense of another, especially in situations where the tax burden has already been shifted to a different party.
When an assessee applies for a refund of excess tax or duty paid, tax authorities carefully examine whether the economic burden of that tax has been passed on to another party, such as a customer. If credible evidence establishes that the incidence of tax has not been transferred, the refund is released directly to the applicant.
Though if it is determined that the burden has indeed been passed on or if the applicant fails to prove otherwise, the refund, though sanctioned, is not paid to the claimant. Instead, it is credited to the Consumer Welfare Fund (CWF), in line with the doctrine of unjust enrichment.
The doctrine is founded on the principle that no one should enrich themselves at another’s expense without a just or lawful basis. Thus, the doctrine protects consumers and ensures fairness in the tax system.
Unjust Enrichment in GST Refunds
The doctrine of unjust enrichment means that if a taxpayer has already shifted the burden of tax to another person, for example by including it in the price charged to customers, then allowing that taxpayer to claim a refund of the same tax would amount to an undue benefit.
To prevent these double recoveries, refund claims under GST are carefully scrutinized against this principle.
Section 54 of the CGST Act, 2017, read with Rule 89(2) of the CGST Rules, 2017, requires that every refund application be supported by documentary evidence establishing two key points:
That the refund claimed is genuinely due to the applicant; and
That the incidence of tax and interest for which the refund is sought has not been passed on to any other person.
Rule 89(2) of the CGST Rules, 2017 prescribes evidentiary requirements to uphold the doctrine.
Practical Evidence for Establishing Incidence
The refund application must provide documentary evidence to demonstrate whether they have passed on the tax burden. It mandates that every applicant must furnish proof confirming that the incidence of tax and interest for which the refund is claimed has not been passed on to any other person. The manner of compliance for this purpose varies based on the amount of refund claimed:
In cases where the refund claim is below ₹2 lakh, the applicant may submit a self-declaration to this effect, instead of detailed documentary evidence.
For refund claims exceeding ₹2 lakh, a certificate issued by a Chartered Accountant or Cost Accountant (as required under sub-rules (l) and (m)) must be furnished, certifying that the tax incidence has not been passed on.
These evidentiary requirements are tied to Section 54(4) of the CGST Act, 2017, and Rule 89(2) of the CGST Rules, 2017, which mandate that refund applications must include documentary evidence proving both that the refund is due and that the tax incidence has not been passed on.
Exceptions to Unjust Enrichment under GST
Under section 54(8) of the GST Act 2017, certain refund claims are exempt from the unjust enrichment test. In these cases, the Doctrine of Unjust Enrichment does not apply, either because the tax burden has not been shifted to another party or due to overriding policy considerations, such as incentivising exports.
Practical Challenges:
Documentation Burden: Small businesses often struggle to produce detailed evidence like CA certificates or reconciled ledgers.
Interpretation Issues: Authorities may differ in interpreting whether the incidence has been passed on, leading to disputes.
Time Delays: Verification of unjust enrichment prolongs refund processing, affecting working capital.
Best Practices for Applicants
Maintain clear records of invoices, contracts, and ledgers.
Obtain timely CA/Cost Accountant certification.
Issue credit notes wherever the tax burden is refunded to customers.
Ensure consistency between financial statements and refund claims.
Highlight statutory exemptions to avoid unnecessary scrutiny.
By concluding this doctrine of unjust enrichment under GST refunds is a safeguard against double benefit and ensures fairness in the tax system. While exporters and certain categories enjoy exemption, most refund applicants must provide practical evidence to prove that they have not passed on the tax incidence.
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