Consequences of Incorrect GST Payments: Penalties and Rectification Procedures

Goods and Services Tax (GST) introduced novel concepts such as 'place of supply' and revised tax frameworks. As a consumption-based tax, GST applies in the state where goods or services are ultimately consumed. This can lead to complex situations and potential errors in tax calculation. For instance, if a seller in Mumbai supplies to a Delhi buyer who requests delivery to Pune, this constitutes an inter-state sale, despite the final destination being within Maharashtra. Such scenarios can cause taxpayers to mistakenly pay the incorrect type of GST. Fortunately, the GST law includes provisions to handle these payment discrepancies.

When Tax is Incorrectly Collected and Deposited

If an incorrect tax amount is collected and submitted to either the Central or a State Government, generally, no penalty is incurred. The following sections detail various situations and their resolutions.

Interstate Sale Mistakenly Treated as Intrastate

Should a taxable entity mistakenly classify an inter-state supply as an intra-state transaction and remit CGST/SGST instead of IGST, the process for correction involves paying the correct IGST. Subsequently, a refund for the erroneously paid CGST/SGST can be claimed.

Intrastate Sale Mistakenly Treated as Interstate

Conversely, if an intra-state supply is incorrectly identified as an inter-state transaction, leading to the payment of IGST instead of CGST/SGST, the taxpayer must pay the appropriate CGST/SGST. They can then seek a refund for the IGST previously paid in error.

It is important to note that no interest is levied when a taxpayer later rectifies an incorrect tax payment. Penalties are also waived in these specific situations. The refund process for such erroneous tax calculations is distinct from standard GST refund procedures. A new clause in the GST Bill explicitly states that interest will not apply when the correct tax is subsequently paid. This provision aims to ease the transition for businesses, particularly Small and Medium Enterprises (SMEs) with limited resources, who might inadvertently make errors during the initial implementation of GST. The GST Council views such mistakes as genuine, without any intent for tax evasion, thus providing significant relief to small entrepreneurs.

When Collected Tax is Not Deposited

If tax is collected but not subsequently deposited with the government, a penalty will indeed be imposed. This section elaborates on these circumstances.

When Collected Tax is Not Deposited with the Centre or States

Although the law shows leniency towards errors in tax type deposits, GST regulations are stringent concerning collected taxes that are not remitted. Any individual collecting GST is legally required to deposit it with the Central or State government, irrespective of whether the underlying supply was taxable. Taxpayers cannot collect GST and later assert that non-deposit was due to the goods or services being exempt. The principle of unjust enrichment is not permitted under GST. In such cases, penalties are enforced regardless of any tribunal or court order. The relevant officer will issue a show-cause notice, and a personal hearing opportunity will be provided if the taxpayer submits a written request.

Process for Payment Order and Penalty

The procedure for issuing a payment order and imposing penalties involves several steps. First, the competent officer will issue an order instructing the individual to pay the outstanding tax amount, along with any applicable penalties. The individual must remit the collected GST and also pay interest for delayed payment. This interest accrual period spans from the date of tax collection until the actual payment date, with specific rates to be determined. The payment order must be issued within one year from the date the show-cause notice was issued. If a Tribunal or court issues a stay order, this period of stay will not count towards the one-year limit.

Handling of Surplus Amounts

Any surplus funds remaining after all dues are settled will either be refunded to the original payer (the buyer) or allocated to the Consumer Welfare Fund under GST. Buyers are eligible to apply for such refunds within six months from the date of public notice.

Conclusion

In summary, GST legislation incorporates stringent measures against tax evasion, aligning with government policies. Nevertheless, acknowledging GST's recent implementation, the legal framework for erroneous or mistaken tax payments has been designed to alleviate the transitional burden and minimize undue stress on taxpayers.