Understanding the Principle of Unjust Enrichment in GST Refunds
The principle of unjust enrichment is a crucial aspect of GST legislation, preventing taxpayers from claiming undeserved refunds by ensuring no one gains unfairly at another's expense. Embedded in Sections 54(5) and 54(8) of the CGST Act, this principle requires most refund claims to pass a specific test. The article details exemptions where the test does not apply, outlines the evidence needed to prove tax burden transfer, and explains that if unjust enrichment is established, refund amounts are redirected to the Consumer Welfare Fund.
The principle of unjust enrichment states that no party should gain unfairly at another's expense. It signifies that individuals or entities should not exploit someone else's position, leading to a loss for one and a gain for another.
Significance of Unjust Enrichment in GST
The Goods and Services Tax (GST) legislation incorporates the principle of unjust enrichment to prevent taxpayers from making unwarranted refund claims. Although the term "unjust enrichment" is not explicitly mentioned in the Central Goods and Services Tax (CGST) Act, its underlying concept is embedded within Sections 54(5) and 54(8). All refund claims must undergo scrutiny against this principle. However, the unjust enrichment test does not apply in the specific scenarios outlined in Section 54(8):
- Refunds sought for:
- Tax paid on zero-rated outward supplies.
- Tax paid on inputs utilized for producing zero-rated outward supplies.
- Refunds of unutilized input tax credit (ITC) balances in the electronic credit ledger due to:
- Zero-rated outward supplies made without tax payment.
- An inverted duty structure, where the tax rate on inputs is higher than on output supplies.
- Refunds related to tax paid on supplies that were not executed, either partially or fully (i.e., no invoice was issued), or when a refund voucher has been provided.
- Refunds for tax erroneously remitted to the Central Government, State Government, or Union Territory, including integrated tax.
- Situations where it is evident that the burden of tax and interest has not been transferred to another party.
- Instances where the burden of tax and interest has been shifted to persons as designated by the government.
Evidence Required for Unjust Enrichment
The principle of unjust enrichment becomes relevant only when the tax authorities possess concrete evidence indicating that the tax burden was passed on to another individual or entity. The incidence of tax is presumed to have been passed on if the tax amount has been recovered from another person.
For refund claims exceeding INR 2 lakh, Rule 89(2) of the CGST Rules, 2017, mandates the submission of a certificate in Annexure 2 of Form GST RFD-01. This certificate, issued by a Chartered Accountant or Cost Accountant, must confirm that the incidence of tax, interest, or any other amount claimed as a refund has not been transferred to any other person.
Consequences if Unjust Enrichment is Established
According to Section 57 of the CGST Act, 2017, if a refund claim fails the unjust enrichment test, the corresponding amounts will be transferred to the Consumer Welfare Fund. These funds then become inaccessible to the taxpayer and are instead utilized by the government for consumer welfare purposes in the prescribed manner.