Tax Refunds and Unjust Enrichment: Income Tax, GST, Customs

A taxpayer who has paid more than is due is entitled to a refund, and Article 265 requires the State to return tax collected without authority of law (Topic 2). For indirect taxes, however, the burden is usually passed on to buyers, so the law refuses refund to a claimant who would be unjustly enriched. This note covers refunds under income tax, GST and customs, and the doctrine of unjust enrichment.

1. Income Tax Refunds

• Sections 431 to 434. A person who has paid tax in excess of his liability, through deduction at source, advance tax or otherwise, is entitled to a refund, claimed ordinarily through the return.
• Legal representatives. Where the person is dead, incapacitated or otherwise unable to claim, his legal representative or other prescribed person may do so.
• Interest. Interest is ordinarily payable on refunds, subject to the conditions in the Act.
• No unjust enrichment. Because income tax is a direct tax borne by the assessee, the bar of unjust enrichment does not apply.

2. GST Refunds: Section 54

Figure 1: Refund under the CGST Act

• Time limit. An application must be made within two years from the relevant date, which varies with the nature of the refund.
• Unutilised credit. Refund of accumulated input tax credit is allowed only for zero-rated supplies made without payment of tax and where the rate on inputs exceeds the rate on output supplies (inverted duty structure)
• Provisional refund. Ninety per cent of a refund claim for zero-rated supplies may be granted provisionally; the Finance Act, 2026 extends this to inverted duty claims from a date to be notified.
• Minimum amount. No refund is paid below Rs 1,000; the Finance Act, 2026 exempts refunds of IGST on exports of goods from this limit.
• Unjust enrichment. Refund is paid to the applicant only in specified cases, such as exports, unutilised credit, or tax not passed on; otherwise it goes to the Consumer Welfare Fund (s.57)

3. The Doctrine of Unjust Enrichment

Figure 2: Unjust enrichment

• Mafatlal Industries v Union of India (1997). A nine judge bench held that refund of indirect taxes, even those collected under unconstitutional levies, is subject to the claimant proving that the burden was not passed on to others; claims ordinarily lie through the statutory refund machinery.
• Customs and excise. Section 27 of the Customs Act and the corresponding excise provision require the claimant to show that the incidence of duty has not been passed on.
• Presumption. Every person who has paid an indirect tax is presumed to have passed on its burden, until he proves otherwise.

4. Inverted Duty Refunds

Figure 3: Leading cases

In Union of India v VKC Footsteps (2021), the Supreme Court upheld the restriction that refund of accumulated credit in an inverted duty structure is available only for credit on inputs, meaning goods, and not on input services, along with the formula in the rules. It observed that the anomalies could be addressed by the GST Council, the Court declining to rewrite the policy.

5. Frequently Asked Questions

Does unjust enrichment apply to income tax refunds?

No. Income tax is a direct tax borne by the assessee, so there is no question of passing on its burden; the doctrine applies to indirect taxes such as GST, customs and excise.

Is refund available on input services in an inverted duty structure?

No. Under s.54(3) and the rules, as upheld in VKC Footsteps (2021), refund of accumulated credit in an inverted duty structure is limited to credit on inputs, meaning goods.

6. Related Topics

• Topic 2: No Tax without Authority of Law, Article 265. Why unauthorised tax must be refunded.
• Topic 29: Input Tax Credit. The credit that may be refunded.
• Topic 33: Customs Act, 1962. Customs refunds.