Comprehensive Guide to GST Section 54: Tax Refunds, ITC & Latest Amendments Explained

Section 54 of the CGST Act, 2017, governs the refund mechanism under India’s GST law, outlining who can claim refunds, under what conditions, and the procedures involved. It allows taxpayers—including exporters, SEZ suppliers, and specified international agencies—to claim refunds of taxes, unutilised input tax credits (ITC), or balances in electronic cash ledgers, typically within two years from a defined “relevant date.”

The section includes recent amendments, such as the omission of the export duty restriction on ITC refunds (Nov 2024) and greater procedural flexibility for refund claims (Oct 2022). Refunds can be provisional (especially for zero-rated supplies), finalised post-verification, and in some cases paid directly to the applicant.

The law also prescribes when refunds can be withheld (e.g., pending appeals or suspected fraud) and the interest due if such refunds are delayed. Comprehensive rules and prescribed forms (like GST-RFD-01 to RFD-11) facilitate these processes. Staying abreast of these evolving provisions is essential for ensuring timely and accurate refund claims.

Decoding GST Section 54: A Comprehensive Guide to Tax Refunds

The Goods and Services Tax (GST) regime in India, which came into effect on July 1, 2017, is designed to be a transparent and efficient indirect tax system. A crucial aspect of this system is the mechanism for tax refunds, primarily governed by Section 54 of the Central Goods and Services Tax (CGST) Act, 2017. This section, along with its associated rules and forms, outlines the conditions, procedures, and timelines for claiming various types of refunds. This article delves into the intricacies of GST Section 54, incorporating the latest amendments and providing maximum possible data for clarity.

Understanding the Core Provisions of Section 54

Section 54 of the CGST Act is the bedrock for all GST refund claims. It broadly categorizes refunds and lays down the general principles for their application and processing.

Who Can Claim a Refund and When? (Section 54(1) & 54(2))

Any person who has paid tax and interest, if any, or any other amount, can claim a refund. The primary window for filing such an application is before the expiry of two years from the “relevant date”.

A significant amendment, effective from October 1, 2022, changed the refund claim process for balances in the electronic cash ledger. Previously tied to the return furnished under Section 39, registered persons can now claim such refunds in a prescribed form and manner, offering greater flexibility.

Specialized agencies of the United Nations, Multilateral Financial Institutions, Consulates or Embassies of foreign countries, and other notified persons are also entitled to refunds of tax paid on inward supplies. They can make an application for such a refund before the expiry of two years from the last day of the quarter in which such supply was received. This period was extended from “six months” to “two years” with effect from October 1, 2022.

Unutilised Input Tax Credit (ITC) Refund (Section 54(3))

Registered persons can claim a refund of any unutilised input tax credit at the end of any tax period. However, this is not an open-ended provision. Refunds of unutilised ITC are generally allowed only in specific cases:

• Zero-rated supplies made without payment of tax: This primarily covers exports of goods or services or supplies to Special Economic Zones (SEZ) without paying Integrated Goods and Services Tax (IGST).
• Inverted duty structure: Where the rate of tax on inputs is higher than the rate of tax on output supplies (excluding nil-rated or fully exempt supplies). The government, on the Council’s recommendations, may notify exceptions to this.

Important Amendments to Section 54(3) Provisos:

A proviso stating that “no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty” was omitted with effect from November 1, 2024, as per the Finance (No. 2) Act, 2024. This implies a potential change in the refund eligibility for goods subject to export duty.

Another crucial restriction is that no refund of ITC is allowed if the supplier avails drawback in respect of central tax or claims a refund of integrated tax paid on such supplies. This prevents double benefits.

Application Procedure and Documentation (Section 54(4))

A refund application must be accompanied by:

Prescribed documentary evidence to establish that a refund is due.

Documentary or other evidence (including Section 33 documents) to prove that the tax and interest were collected from or paid by the applicant, and the incidence of such tax had not been passed on to any other person (the principle of “unjust enrichment”).

Relaxation for Smaller Claims: If the refund amount is less than two lakh rupees, the applicant is not required to furnish documentary and other evidence, but can instead file a declaration certifying that the tax incidence was not passed on.

Processing and Sanctioning of Refunds (Section 54(5), 54(6), 54(7))

Upon receiving an application, if the proper officer is satisfied that the refund is due, an order is issued, and the amount is credited to the Consumer Welfare Fund (Section 57).

Provisional Refund for Zero-Rated Supplies (Section 54(6)): For claims related to zero-rated supplies, the proper officer may sanction a provisional refund of ninety per cent of the total claimed amount. This provisional refund is granted in a prescribed manner and subject to conditions, limitations, and safeguards. Notably, the phrase “excluding the amount of input tax credit provisionally accepted,” was omitted from this sub-section with effect from October 1, 2023, by the Finance Act 2023. This amendment simplifies the calculation for provisional refunds. A final settlement order under Section 54(5) is issued after due verification.

The proper officer is mandated to issue the final refund order under Section 54(5) within sixty days from the date of receipt of a complete application.

Direct Payment to Applicant (Section 54(8) & 54(8A))

Notwithstanding the general rule of crediting to the Consumer Welfare Fund, the refundable amount is paid directly to the applicant in specific cases, including:

• Refund of tax paid on export of goods or services, or on inputs/input services used in such exports.
• Refund of unutilised ITC under Section 54(3).
• Refund of tax on a supply not provided (wholly or partially) where an invoice hasn’t been issued, or a refund voucher has been issued.
• Refund of tax in pursuance of Section 77.
• Tax and interest paid by the applicant where the incidence was not passed on.
• Tax or interest borne by other notified classes of applicants.

Section 54(8A) further allows the Government to disburse the refund of State tax in a prescribed manner.

Restriction on Refund and Withholding Provisions (Section 54(9), 54(10), 54(11), 54(12))

Section 54(9) unequivocally states that no refund shall be made except in accordance with the provisions of sub-section (8), overriding any contrary judgment or order.

Section 54(10) empowers the proper officer to withhold refund due to a registered person who has defaulted in furnishing any return or is liable to pay any tax, interest, or penalty, provided such payment is not stayed by any court or tribunal. The officer can withhold the refund until the default is rectified or deduct the unpaid amount from the refund. The explanation clarifies that “specified date” for this sub-section refers to the last date for filing an appeal. It’s important to note that sub-section (10) was omitted with effect from October 1, 2022, by the Finance Act, 2022. This means the specific power to withhold refunds for defaulting taxpayers under this sub-section is no longer active as per the current law.

Section 54(11) grants the Commissioner the power to withhold a refund if an order giving rise to the refund is under appeal or further proceedings, or if other proceedings are pending, and the Commissioner believes granting the refund is likely to adversely affect revenue due to malfeasance or fraud. This can be done after providing the taxable person an opportunity of being heard.

Section 54(12) provides for interest on withheld refunds. If a refund is withheld under sub-section (11) and the taxable person eventually becomes entitled to the refund as a result of appeal or further proceedings, they will be entitled to interest at a rate not exceeding six per cent.

Other Important Considerations

• Casual and Non-Resident Taxable Persons (Section 54(13)): Advance tax deposited by casual or non-resident taxable persons under Section 27(2) will not be refunded unless all returns required under Section 39 for the entire period of registration have been furnished.
• Minimum Refund Amount (Section 54(14)): No refund under sub-section (5) or sub-section (6) will be paid if the amount is less than one thousand rupees.
• Export Duty and Zero-Rated Supplies (Section 54(15)): A new sub-section 54(15) was inserted with effect from November 1, 2024, by the Finance (No. 2) Act, 2024. This provision explicitly states that no refund of unutilised input tax credit on account of zero-rated supply of goods, or of integrated tax paid on account of zero-rated supply of goods, shall be allowed where such zero-rated supply of goods is subjected to export duty. This reinforces the principle of not providing refunds where export duty is levied.

Defining “Refund” and “Relevant Date”

The Explanation to Section 54 provides crucial definitions:

• “Refund” broadly includes refund of tax paid on zero-rated supplies (goods or services, or inputs/input services used therein), tax on deemed exports, and unutilised ITC under sub-section (3).
• “Relevant date” is critical for determining the two-year limitation period. It varies depending on the nature of the supply:
  • Export of goods: Date of departure of ship/aircraft, date goods pass frontier (land), or date of dispatch by post office.
  • Deemed exports: Date of furnishing the return related to such deemed exports.
  • Zero-rated supply to SEZ: Due date for furnishing return under Section 39. (This sub-clause (ba) was inserted by the Finance Act, 2022).
  • Export of services: Date of receipt of payment (if services completed prior to payment) or date of invoice issue (if payment received in advance).
  • Consequence of judgment/order: Date of communication of such judgment/order.
  • Unutilised ITC (inverted duty structure): Due date for furnishing return under Section 39 for the period the claim arises.
  • Provisionally paid tax: Date of tax adjustment after final assessment.
  • Recipient of goods/services (other than supplier): Date of receipt of goods or services.
  • Any other case: Date of payment of tax.

Relevant Rules and Forms for Section 54

The effective implementation of Section 54 is facilitated by a comprehensive set of GST rules and forms:

• Rule 89: Application for refund of tax, interest, penalty, fees or any other amount
  • FORM-GST-RFD-01: The primary application form for refund.
• Rule 90: Acknowledgement
  • FORM-GST-RFD-01 W: Application for Withdrawal of Refund Application.
  • FORM-GST-RFD-02: Acknowledgment of refund application.
  • FORM-GST-RFD-03: Deficiency Memo, if the application is incomplete.
• Rule 91: Grant of provisional refund
  • FORM-GST-RFD-04: Provisional Refund Order.
  • FORM-GST-RFD-05: Payment Order (also used for final refunds and interest).
• Rule 92: Order sanctioning refund
  • FORM-GST-RFD-06: Refund Sanction/Rejection Order.
  • FORM-GST-RFD-07: Order for withholding the refund.
  • FORM-GST-RFD-08: Notice for rejection of application for refund.
  • FORM-GST-RFD-09: Reply to show cause notice.
• Rule 93: Credit of the amount of rejected refund claim
  • References FORM-GST-RFD-03 for deficiency memo related to rejected claims.
• Rule 94: Order sanctioning interest on delayed refunds
  • FORM-GST-RFD-05: Payment Order (for interest).
• Rule 96: Refund of integrated tax paid on goods or services exported out of India
  • FORM-GST-RFD-01: Application for Refund.
  • FORM-GST-RFD-06: Refund Sanction/Rejection Order.
  • FORM-GST-RFD-07: Order for withholding the refund.
• Rule 96A: Export of goods or services under bond or Letter of Undertaking
  • FORM-GST-RFD-11: Furnishing of bond or Letter of Undertaking for export.
• Rule 96B: Recovery of refund of unutilised input tax credit or integrated tax paid on export of goods where export proceeds not realized.
• Rule 97A: Manual filing and processing
  • FORM-GST-RFD-01 A: Application for Refund (Manual).
  • FORM-GST-RFD-01 B: Refund Order details.

FAQs on Section 54 of CGST Act

What is Section 54 of the CGST Act?
Section 54 of the Central Goods and Services Tax (CGST) Act, 2017 deals with the process, eligibility, and conditions for claiming GST refunds in India.

Who is eligible to claim a GST refund under Section 54?
Any registered taxpayer who has paid tax, interest, or any other amount can claim a refund, including exporters, SEZ suppliers, and certain international organizations.

What is the time limit for filing a GST refund claim?
Refund claims must be filed within two years from the relevant date, which varies depending on the type of supply or event.

What are zero-rated supplies under Section 54?
Zero-rated supplies include exports and supplies to SEZs. Refunds can be claimed either of unutilised ITC or tax paid on such supplies.

What is unutilised input tax credit (ITC) and when can it be refunded?
Unutilised ITC refers to input tax credit that exceeds tax liability. It can be refunded in cases of zero-rated supplies or an inverted duty structure.

What is an inverted duty structure?
An inverted duty structure exists when the GST rate on inputs is higher than on output supplies, leading to accumulation of ITC.

Can refund be claimed for tax paid under the electronic cash ledger?
Yes, refund of balances in the electronic cash ledger can be claimed in a prescribed manner, independent of the return filing under Section 39.

Can United Nations and foreign consulates claim GST refunds?
Yes, specified international agencies can claim refunds for GST paid on inward supplies within two years from the end of the relevant quarter.

What is the provisional refund mechanism under Section 54?
For zero-rated supplies, a provisional refund of 90% of the claim may be granted before final verification and sanction of the full refund.

What documentation is required for filing a refund claim?
Prescribed documentary evidence is required to prove eligibility and ensure the tax incidence has not been passed on, except for claims under ₹2 lakh.

What happens if the refund claim is less than ₹2 lakh?
Applicants can file a self-declaration instead of full documentation, stating the tax burden has not been passed to another person.

Is there interest paid on delayed refunds?
Yes, interest may be paid if the refund is delayed beyond 60 days or if withheld refunds are later granted due to favorable appeal outcomes.

Can refunds be withheld by authorities?
Yes, refunds may be withheld if the taxpayer is under investigation, an appeal is pending, or if there is suspicion of fraud or revenue risk.

What changes were made to refund rules for export duty goods?
From November 1, 2024, the restriction on ITC refunds for goods subjected to export duty was removed, expanding refund eligibility.

What are some major amendments to Section 54?
Key changes include new refund procedures for cash ledger balances, extension of time limits, and simplified provisional refund calculations.

What forms are used for claiming GST refunds?
Forms include GST-RFD-01 for applications, RFD-04 for provisional orders, RFD-06 for sanction/rejection, and others for acknowledgments and responses.

What is the minimum refund amount allowed under Section 54?
Refunds below ₹1,000 are not processed under sub-sections (5) or (6).

Can refunds be directly credited to the taxpayer’s account?
Yes, in cases like export refunds, unutilised ITC, and incorrect tax payments, refunds are credited directly to the applicant.

What is unjust enrichment in the context of GST refunds?
Unjust enrichment refers to claiming a refund for tax that has been passed on to another party. Refunds are denied unless this is disproven.

Can casual or non-resident taxpayers get a refund?
Yes, but only after they file all required returns for the registration period.

What happens if export proceeds are not realized?
If export proceeds are not realized, the refund of ITC or IGST paid on such exports may be recovered under Rule 96B.

What is the relevant date for refund claims?
The relevant date varies depending on the transaction type, such as date of shipment for exports or date of return filing for deemed exports.

How are GST refund claims processed?
Claims are verified by the proper officer, provisional refunds may be issued, and a final order is passed within 60 days of application receipt.

Can refund claims be withdrawn?
Yes, using FORM-GST-RFD-01W, a taxpayer can withdraw their refund application.

What is Rule 89 under GST?
Rule 89 provides the procedure for applying for refunds of tax, interest, penalty, fees, or any other amount under GST.

Is manual filing of refund allowed?
Yes, manual filing is permitted under Rule 97A using FORM-GST-RFD-01A and related forms, especially in cases of system issues or special circumstances.

GST Section 54, with its detailed provisions and accompanying rules, forms the cornerstone of the refund mechanism under the Indian GST law. Understanding these provisions is critical for taxpayers to claim eligible refunds efficiently and avoid unnecessary delays or rejections.

The continuous amendments, such as the extension of limitation periods and clarifications regarding zero-rated supplies, underscore the government’s efforts to refine and streamline the refund process, making it more taxpayer-friendly while safeguarding revenue interests. Staying updated with these changes is paramount for effective GST compliance and optimal utilization of input tax credit.