GST Section 56: Interest on Delayed Refunds and Timely Disbursement Explained

Section 56 of the Central Goods and Services Tax (CGST) Act, 2017, ensures timely disbursement of tax refunds by mandating interest payments on delays, thus safeguarding taxpayer liquidity, especially for MSMEs and exporters. Effective from July 1, 2017, it stipulates that if refunds are not issued within 60 days of application receipt, a 6% annual interest applies, rising to 9% in cases where refunds result from final adjudicated orders.

The provision, supported by Rule 94 and FORM GST RFD-05, outlines the process for sanctioning and disbursing interest, while amendments clarify the interest calculation period. Overall, it promotes accountability, encourages compliance, and ensures legal recourse for taxpayers.

GST Section 56: Ensuring Timely Refunds with Interest on Delays

The Goods and Services Tax (GST) regime in India aims for a streamlined and efficient tax administration. A crucial aspect of this efficiency is the timely processing of refunds to taxpayers. To safeguard against delays and ensure that taxpayers are not unduly burdened by blocked working capital, Section 56 of the Central Goods and Services Tax (CGST) Act, 2017, provides for the payment of interest on delayed refunds.

This section came into force on July 1, 2017, via Notification No. 9/2017-Central Tax, G.S.R. 658(E), dated June 28, 2017, highlighting the government’s commitment to prompt refund disbursement from the very inception of GST.

Core Provisions of Section 56

General Rule: Interest on Delayed Refunds

As per Section 56, if any tax ordered to be refunded under sub-section (5) of Section 54 to an applicant is not refunded within sixty days from the date of receipt of the application under sub-section (1) of that section, interest becomes payable.

• Interest Rate: The interest rate, as specified in a notification issued by the Government on the recommendations of the GST Council, shall not exceed six per cent (6%).
• Period of Delay: The interest is payable for the period of delay beyond sixty days from the date of receipt of the refund application until the date of refund of such tax.
• Computation and Conditions: The computation of interest and its applicability are subject to such manner, conditions, and restrictions as may be prescribed.
  • Note on Amendment: The wording regarding the period of delay was substituted by the Finance Act 2023, effective from October 1, 2023, vide Notification No. 28/2023-Central Tax, S.O. 3422(E), dated July 31, 2023. Previously, it stated “from the date immediately after the expiry of sixty days from the date of receipt of application under the said sub-section till the date of refund of such tax.” The amendment clarifies that interest is calculated for the entire period of delay beyond the initial 60 days.

Enhanced Interest for Adjudicated Refunds

A significant proviso to Section 56 addresses situations where a refund claim arises from an order passed by an adjudicating authority, Appellate Authority, Appellate Tribunal, or court that has attained finality. In such cases, if the refund is not processed within sixty days from the date of receipt of the application filed consequent to such order, a higher interest rate is applicable.

• Higher Interest Rate: The interest rate in these specific scenarios shall not exceed nine per cent (9%), as may be notified by the Government on the recommendations of the Council.
• Commencement of Interest: This higher interest is payable from the date immediately after the expiry of sixty days from the date of receipt of the application till the date of refund.

Explanation Regarding Appellate Orders

The explanation to Section 56 clarifies that if an order of refund is made by an Appellate Authority, Appellate Tribunal, or any court against an order of the proper officer under sub-section (5) of Section 54, the order passed by the Appellate Authority, Appellate Tribunal, or by the court is deemed to be an order passed under the said sub-section (5). This ensures that the provisions of Section 56, including the higher interest rate for adjudicated refunds, apply seamlessly to such cases.

Current Notified Interest Rates

As per Notification No. 13/2017-Central Tax, dated June 28, 2017, the interest rates for delayed refunds are currently:

• 6% per annum for general delayed refunds (as per the main provision of Section 56).
• 9% per annum for delayed refunds arising from an order passed by an adjudicating authority, Appellate Authority, Appellate Tribunal, or court (as per the proviso to Section 56).

Relevant Rules and Forms

To give effect to Section 56, the following rule and form are crucial:

• Rule 94: Order sanctioning interest on delayed refunds
  • This rule outlines the procedure for sanctioning interest on delayed refunds. It mandates that when interest is due and payable under Section 56, the proper officer shall issue an order along with a payment order in FORM GST RFD-05. This order will specify the amount of refund delayed, the period of delay, and the amount of interest payable.
  • Key exclusion periods in Rule 94(2):
    • Any period beyond fifteen days of receipt of a notice in FORM GST RFD-08 (deficiency memo) that the applicant takes to furnish a reply in FORM GST RFD-09 or submit additional documents.
    • Any period taken by the applicant to furnish correct bank details or for validating those details if the refund could not be credited due to incorrect information.
• FORM GST RFD-05: Payment Order
  • This form is the official payment advice issued by the GST officer, authorizing the disbursement of the sanctioned refund amount, including any interest on delayed payment, to the taxpayer’s registered bank account.
  • It contains essential details such as the GSTIN, Application Reference Number (ARN), refund sanction order number (if applicable, typically from RFD-04), date of payment advice, tax period, sanctioned refund amount (with breakup of IGST, CGST, SGST, and Cess), taxpayer’s name, bank account details, and authorized officer details.
  • The issuance of RFD-05 signifies the formal approval of the refund claim and initiates the credit process to the taxpayer’s bank account.

Impact on Taxpayers and the Ecosystem

Section 56 serves as a vital provision for taxpayers, particularly businesses that rely on smooth cash flow. Delayed refunds can significantly impact working capital, especially for Micro, Small, and Medium Enterprises (MSMEs) and exporters. The provision of interest on delayed refunds:

• Ensures Liquidity: It acts as a deterrent against bureaucratic delays and encourages timely processing of refunds, thereby safeguarding the working capital of businesses.
• Promotes Compliance: Knowing that interest is payable on delays reinforces the government’s commitment to a fair and transparent tax system, encouraging taxpayers to comply.
• Provides Legal Recourse: Taxpayers have a legal basis to claim interest if their refunds are not processed within the stipulated timelines.

FAQs on Section 56 of CGST Act

What is Section 56 of the CGST Act, 2017?
Section 56 provides for the payment of interest to taxpayers on delayed refunds under the GST regime to ensure timely processing and disbursement.

When does interest become payable on delayed GST refunds?
Interest is payable if the refund is not made within 60 days from the date of receipt of the refund application.

What is the standard rate of interest for delayed refunds?
The standard rate is up to 6% per annum, as notified by the government on the recommendations of the GST Council.

Is there a higher interest rate for certain types of refund delays?
Yes, a higher rate of up to 9% per annum applies if the refund arises from an order by an adjudicating authority, appellate authority, tribunal, or court that has attained finality.

From when is interest calculated in case of delayed refunds?
Interest is calculated from the day after the expiry of 60 days from the receipt of the refund application until the actual refund date.

Has Section 56 been amended?
Yes, the Finance Act 2023 amended the wording to clarify that interest is payable for the entire period of delay beyond 60 days.

Which notification made Section 56 effective?
Section 56 was made effective through Notification No. 9/2017-Central Tax, dated June 28, 2017.

What form is used to issue a refund payment order with interest?
FORM GST RFD-05 is used to issue the payment advice, including details of the interest payable on delayed refunds.

Which rule governs the sanction of interest on delayed refunds?
Rule 94 of the CGST Rules outlines the process for sanctioning interest on delayed refunds.

What details are included in FORM GST RFD-05?
It includes GSTIN, ARN, refund sanction order number, tax period, amount sanctioned, bank account details, and officer authorization.

Are there any exclusions in calculating the interest period?
Yes, the period taken by the applicant to respond to a deficiency memo or to correct/validate bank details is excluded.

What if a refund order is passed by an appellate authority or court?
Such an order is deemed to be one under Section 54(5), making the provisions of Section 56, including the higher interest rate, applicable.

Why is Section 56 important for taxpayers?
It ensures timely refund processing, improves cash flow, especially for MSMEs and exporters, and provides legal recourse for delayed payments.

Does Section 56 apply to all refund claims?
It applies to all refund claims where the refund is due under Section 54(5), including those finalized through appellate or judicial orders.

How does Section 56 benefit businesses?
It helps maintain working capital efficiency by deterring refund delays, thus supporting operational and financial stability.

Can taxpayers claim interest if refunds are delayed due to department error?
Yes, if the delay exceeds 60 days without fault on the taxpayer’s part, interest becomes payable regardless of departmental error.

What is the legal basis for the interest rate on delayed refunds?
The government notifies the applicable interest rates based on recommendations from the GST Council.

Is prior approval needed for interest to be paid on delayed refunds?
Yes, the proper officer must issue an order under Rule 94 along with FORM GST RFD-05 to authorize the payment.

Can taxpayers challenge refund delays in court?
Yes, taxpayers can seek legal remedy if refunds and interest due under Section 56 are not processed timely.

Does the refund interest apply to all types of GST (CGST, SGST, IGST, Cess)?
Yes, interest applies to all GST components covered under the refund claim.

In conclusion, GST Section 56, along with its associated rules and forms, is a critical component of the GST framework, designed to ensure that taxpayers receive their rightful refunds promptly and are compensated for any undue delays. This provision underscores the principle of efficient tax administration and aims to foster a more business-friendly environment under GST.