Restitution and Reality: The Interplay of Refunds and the Doctrine of Unjust Enrichment under GST and Customs Jurisprudence.

I. Introduction

Taxation statutes are not merely fiscal instruments; they are expressions of the constitutional relationship between the State and the taxpayer. Within this framework, the concept of refunds functions as a corrective mechanism — ensuring that the State does not retain monies that are not legally due. However, the doctrine of unjust enrichment acts as a crucial restraint on refund claims, preventing a taxpayer from receiving an amount that has, in substance, already been passed on to another.

In the realm of Customs Law and Goods and Services Tax (GST), the principles of unjust enrichment have assumed paramount significance. They ensure that refunds are granted only to those who have truly borne the incidence of tax, thereby maintaining equity between the exchequer, the taxpayer, and the ultimate consumer.

II. Conceptual Foundation of Unjust Enrichment

The doctrine of unjust enrichment is a principle of equity, rooted in the maxim “nemo debet locupletari ex aliena jactura” — no one ought to be enriched at the expense of another. In taxation, it serves a dual purpose:

1. To prevent the duplication of benefits where the tax burden has already been shifted to a third party; and

2. To safeguard the public revenue against unwarranted restitution.

Thus, while refund provisions ensure justice to the taxpayer, the doctrine of unjust enrichment ensures justice to the public at large.

III. Refunds under Customs Law

A. Statutory Framework

Refunds under the Customs Act, 1962 are governed by Section 27, which provides that any person claiming refund of customs duty or interest must make an application within the prescribed period. Importantly, Section 27(2) stipulates that no refund shall be made unless the claimant establishes that the incidence of duty has not been passed on to any other person — a clear statutory embodiment of the doctrine of unjust enrichment.

The Customs (Refund of Duty and Interest) Rules, 1995 supplement this by prescribing procedural requirements, including documentary evidence to establish that the burden of duty was borne by the claimant.

B. Judicial Interpretation

The Supreme Court in MAFATLAL INDUSTRIES LTD. Versus UNION OF INDIA - 1996 (12) TMI 50 - Supreme Court laid down the seminal exposition on refund and unjust enrichment principles. The Court held:

• Any refund claim must conform to the provisions of the parent statute;
• Even where the levy is unconstitutional or illegal, the refund is subject to the test of unjust enrichment; and
• The burden lies upon the claimant to prove that the tax incidence has not been passed on.

Further, in COMMISSIONER OF C. EX., MUMBAI-II Versus ALLIED PHOTOGRAPHICS INDIA LTD. - 2004 (3) TMI 63 - Supreme Court, it was reaffirmed that unless the taxpayer conclusively demonstrates that the burden of duty was not passed on to another, refund cannot be sanctioned.

C. Evidentiary Burden

To rebut the presumption of unjust enrichment, the claimant must furnish evidence such as:

• Chartered Accountant certificates;
• Balance sheets or profit and loss accounts showing the duty as an expense and not recoverable; and
• Declarations from buyers or contractual documents proving that the duty was absorbed by the claimant.

Failure to produce such evidence results in rejection of refund claims, even if the duty was collected without authority of law.

IV. Refunds and Unjust Enrichment under GST Law

A. Statutory Embodiment

The Central Goods and Services Tax Act, 2017 (CGST Act) enshrines the concept of unjust enrichment in Sections 54 to 57.

• Section 54(5)provides that refund shall be paid only after due verification that the incidence of tax has not been passed on.
• Section 54(8) lists exceptions, such as refunds of tax paid on exports (zero-rated supplies), where the doctrine does not apply.
• Section 56 provides for interest on delayed refunds, and
• Section 57 establishes the Consumer Welfare Fund (CWF) — where amounts determined as hit by unjust enrichment are credited.

Thus, the GST framework ensures that the ultimate benefit of refund accrues either to the taxpayer who has borne the burden or, failing that, to the CWF for public use.

B. Practical Application

Refunds under GST can arise from various circumstances, such as:

• Excess payment of tax;
• Tax paid on exports (zero-rated supplies);
• Accumulated Input Tax Credit (ITC) due to inverted duty structure; or
• Tax paid on supplies not provided or cancelled.

Except for cases where the refund relates to zero-rated supplies or accumulated ITC, the claimant must establish that the tax burden has not been transferred to another person.

C. Judicial and Administrative Interpretation

Indian courts have upheld the application of unjust enrichment in GST refunds, emphasizing that:

• Refund claims cannot become a source of profit;
• The onus lies on the taxpayer to demonstrate that the tax incidence was not passed on.

Case Law:Commissioner of Central Excise, Madras Versus M/s Addison & Co. Ltd. - 2016 (8) TMI 1071 - Supreme Court – The Supreme Court held that unless the taxpayer proves that the burden of tax was not passed on, the refund cannot be sanctioned even if the levy was erroneous.

Similarly, in GST regime, courts have reiterated that refund claims without adequate evidence of tax incidence being borne by the claimant are unsustainable.

V. Mechanism of Credit to the Consumer Welfare Fund

Where refund claims fail the test of unjust enrichment, the amount is not retained by the government as revenue but credited to the Consumer Welfare Fund (CWF) under Section 57 of the CGST Act and Section 27(2) of the Customs Act. This mechanism reflects the equitable intent that any unjustly collected tax should ultimately serve the public interest, thereby achieving a form of constructive restitution to consumers.

VI. Doctrinal and Constitutional Dimensions

The doctrine of unjust enrichment in taxation is consistent with Article 265 of the Constitution of India, which mandates that no tax shall be levied or collected except by authority of law. However, where refund of an illegal levy would result in enrichment at the cost of consumers, the courts have harmonized Article 265 with equitable considerations, recognizing that constitutional legality and economic justice must coexist.

VII. Burden of Proof and Evidentiary Presumption

The statutory presumption of unjust enrichment under both GST and Customs laws is rebuttable but not illusory. The claimant bears a heavy evidentiary burden to show:

1. The duty/tax has not been recovered from another; or

2. The incidence has been contractually absorbed.

In absence of such proof, authorities are bound to reject refund claims or direct the refund amount to the Consumer Welfare Fund.

VIII. Contemporary Challenges

1. Complex Pricing Structures: Multi-tiered supply chains make it difficult to trace tax incidence.

2. E-Invoicing and Data Verification: While digital records assist verification, minor discrepancies often delay refunds.

3. Overlapping Jurisdiction: Customs and GST overlap in import/export contexts, leading to interpretational challenges.

4. Litigation Delays: Despite statutory time limits, refund disputes continue to occupy significant judicial bandwidth.

IX. Conclusion

The relationship between refunds and unjust enrichment in Customs and GST laws represents the equilibrium between individual fairness and collective equity. While refund provisions ensure that the State does not unjustly retain monies, the doctrine of unjust enrichment ensures that no taxpayer profits at the expense of consumers or the exchequer.

Both under Customs and GST, Indian jurisprudence has evolved a balanced restitutionary framework, combining statutory clarity with equitable restraint. Ultimately, the principle is not punitive but protective — it upholds the integrity of fiscal administration and the morality of taxation.

In Essence:

Refund is a matter of right only when retention by the State becomes unjust;
but it ceases to be a right when the refund itself would amount to unjust enrichment.