Chapter 3: Interest on Delayed Refunds (Section 56)

Section 56 of the CGST Act, 2017, along with associated rules and notifications, establishes provisions for the payment of interest on delayed refunds under the Goods and Services Tax (GST) law. This mechanism is designed to compensate taxpayers for financial inconvenience and strain when legitimate refund claims are not processed within stipulated timeframes. The core principle is that if a refund due to a taxpayer is not disbursed within a specified period, interest becomes payable. The Act differentiates interest rates based on the authority that ordered the refund and the stage at which the delay occurs.

The payment of interest on delayed refunds is contingent upon the authority ordering the refund and the specific circumstances of the delay.

Delays Post-Proper Officer Order

When a refund is ordered by the Proper Officer under Section 54(5) of the CGST Act, specific conditions govern the payment of interest:

Triggering Event: Interest becomes payable if the tax amount ordered to be refunded is not disbursed to the applicant within 60 days from the date of receipt of the refund application filed under Section 54(1).

Interest Rate: The applicable interest rate is  per annum, as notified vide Notification No. 13/2017-CT dated 28.06.2017.

Period of Interest: Interest accrues from the date immediately following the expiry of the 60-day period (i.e., from the 61st day) until the date the refund is actually made.

Delays Post-Appellate Authority or Further Proceedings Order

A distinct interest rate applies when the refund originates from an order passed by a higher authority, such as an Adjudicating Authority, Appellate Authority, Appellate Tribunal, or any Court, and such order has attained finality.

Triggering Event: Interest is payable if the refund claim, arising from a final order of an Adjudicating Authority or any higher appellate forum or court, is not disbursed within 60 days from the date of receipt of the application filed consequent to such order.

Interest Rate: The interest rate applicable in these scenarios is  per annum, also notified vide Notification No. 13/2017-CT dated 28.06.2017.

Period of Interest: Similar to delays post-Proper Officer order, interest is payable from the date immediately following the expiry of the 60-day period until the date of refund.

Rule 94 of the CGST Rules, 2017, along with clarifying circulars, outlines the process for sanctioning and disbursing interest on delayed refunds.

Order for Interest: Where interest is due and payable under Section 56, the proper officer is mandated to issue an order sanctioning the interest. This order must be accompanied by a payment order in the prescribed form.

Details in the Order: The sanction order must explicitly specify:

The amount of refund that has been delayed.

The period of delay for which interest is payable.

Timely Disbursement: To promote prompt processing and avoid interest accrual, tax authorities are advised to issue the final sanction order and payment order within 45 days from the date of generation of the Application Reference Number (ARN). This aims to facilitate the complete disbursement of the refund within the statutory 60-day period.

Crediting to Bank Account: For the purpose of determining when a tax has been refunded, the amount is considered refunded only when it has been credited to the bank account of the applicant.

Section 56 of the CGST Act serves as a critical safeguard for taxpayers, ensuring compensation for the time value of money when the tax administration delays rightful refunds beyond the prescribed period. The differentiation in interest rates reflects the varying levels of authority and potential complexities associated with refund claims arising from higher judicial or appellate pronouncements.