Erroneous Refunds: How the Department Gets the Money Back

Erroneous Refunds explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

A refund is sanctioned, paid, and later found not to have been due. It is not simply reversed. It is demanded, through the same machinery as any other short payment.

Sections 73, 74 and 74A each expressly cover tax "erroneously refunded". Section 73 covers non-fraud cases up to FY 2023-24; section 74 the fraud limb for the same periods; and section 74A governs FY 2024-25 onwards, merging the two with differentiated penalties. Interest under s.50 runs on the erroneously refunded amount. Specific recovery provisions — notably Rule 96B for unrealised export proceeds — sit alongside them.

The demand provisions

Section 73(1) — where it appears that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason other than fraud or any wilful misstatement or suppression of facts, the proper officer shall serve notice requiring the person to show cause why the amount should not be paid, along with interest and a penalty.

Section 74(1) — the same, by reason of fraud, or any wilful misstatement or suppression of facts to evade tax.

Section 74A — inserted by the Finance (No. 2) Act, 2024, governing FY 2024-25 onwards, with a common limitation period and differentiated penalties: ten per cent of tax or ₹10,000, whichever is higher, for the non-fraud category; fifty per cent where fraud, wilful misstatement or suppression is established. Section 74A →

The protections that apply

Because it is a demand proceeding, the ordinary protections attach:

A show cause notice — in FORM GST DRC-01, with a summary, preceded by an intimation in DRC-01A where the officer proposes to communicate the ascertained liability before issuing the notice.

An opportunity to reply and to be heard.

A reasoned order — in FORM GST DRC-07.

Limitation — under s.73 and s.74 by reference to the annual return due date, and under s.74A on the common period.

Appeal under s.107, on a 10% pre-deposit.

That distinguishes an erroneous refund recovery from the Rule 96B thirty-day deposit obligation, which is a voluntary step the taxpayer takes before any notice. Where the deposit is not made, the recovery proceeds through the demand machinery with all its protections — and its penalty exposure. Rule 96B →

Interest

Section 50(1) applies to the erroneously refunded amount, at 18%.

Rule 88B(2): in all cases other than a late-filed return, interest is calculated on the amount of tax which remains unpaid, for the period starting from the date on which such tax was due to be paid till the date such tax is paid.

For an erroneous refund, the amount became due when it was wrongly received, so interest runs from the date of the refund to the date of repayment. That can be a long period on an old claim.

Note that s.50(3) — the availed-and-utilised test — applies to credit wrongly availed and utilised, not to an erroneous refund of tax. An erroneous refund is a payment out, and the ledger-balance analysis does not apply to it. Interest on wrongly availed ITC →

Where erroneous refunds most commonly arise

Export proceeds not realised — the Rule 96B case, the most common by volume.

Rule 96(10) breach — an exporter claiming the IGST with-payment refund despite having received supplies on which the merchant export or duty-free notifications were availed. Rules 89(4A) and (4B) →

Formula error — an overstated Net ITC, a missed 1.5 times cap on export turnover, or exempt turnover wrongly excluded from Adjusted Total Turnover. Rule 89(4) →

Credit later found ineligible — a refund of unutilised credit where the underlying credit is subsequently disallowed under s.16 or s.17(5).

Supplier non-compliance discovered later — credit refunded, then reversed under Rule 37A or on a s.16(2)(c) finding.

Unjust enrichment — a refund paid to the applicant that should have gone to the Consumer Welfare Fund, where the certificate is later found to be unsupported. Section 54(8) →

Double claim — supplier and recipient both claiming a deemed export refund, which is what the undertakings exist to prevent. Deemed export refunds →

Practical notes

• Keep the refund file for the s.36 retention period — seventy-two months from the annual return due date, extended while any proceeding runs. The demand may come years later. Document retention →
• Track export realisation shipment by shipment, because Rule 96B is the largest single source.
• Where a defect is found, deposit voluntarily through DRC-03 rather than waiting. It stops interest running and materially improves the penalty position — under s.74A(8) and (9), payment before or shortly after the notice reduces or eliminates penalty.
• Distinguish the fraud limb. A formula error or a genuine classification difference is not suppression, and the notice should be answered on that footing.
• Check limitation. An erroneous refund demand is subject to the same periods as any other, and old claims may be time-barred.

Key takeaways

• s.73, s.74 and s.74A all expressly cover tax "erroneously refunded".
• s.74A governs FY 2024-25 onwards with a common limitation and differentiated penalties.
• Interest under s.50(1) runs from the date of the refund to repayment.
• The full demand protections apply — notice, reply, hearing, order, appeal.
• Rule 96B is the largest single source, and its thirty-day deposit is the cheaper route.
• Voluntary payment through DRC-03 improves the penalty position materially.

Read next

• Rule 96B: Recovery Where Export Proceeds Are Not Realised
• Section 73 vs Section 74: Differences in GST Demands
• Section 74A CGST Act: Tax Determination
• DRC-03: Voluntary Tax Payment Before or After a Notice

Disclaimer: Positions stated as on 5 September 2026, based on the CGST Act and Rules as amended to 31 March 2026 (ICAI Bare Law, 12th edition) and the ICAI Handbook on Refunds under GST (January 2026).