GST Refunds Paid Under Mistake of Law: Constitutional Restitution Beyond Section 54

I. Constitutional Question: Can the State Keep What It Was Never Entitled to Receive?

Indirect tax laws like GST are drafted as exhaustive self-contained codes—setting out the charging event, valuation rules, rates, refund procedures, limitation, adjudication, appeals, recovery and more. In theory, such laws are designed for precision and predictability. In practice, however, imperfections in drafting, interpretation and implementation often produce situations for which the statute offers no straightforward answer.

One particularly important situation arises when an assessee deposits money with the Government under a mistaken understanding of law. A series of questions immediately emerge:

  • Does such a payment automatically become “tax” merely because it was paid using the statutory machinery?
  • Can the Revenue insist that Section 54 of the CGST Act, 2017 must strictly control the refund of this amount—including its stringent two-year limitation?
  • Does the Government have any constitutional authority to retain a sum which, in substance, was never lawfully leviable?
  • Does Article 265 of the Constitution override the statutory framework where the levy itself lacks authority of law?

These questions go beyond routine statutory construction and lead directly into constitutional territory. The doctrine of “mistake of law” and the principle of restitution provide the framework for resolving such disputes. In the GST context, where frequent notifications, clarifications and evolving judicial decisions create fluid legal positions, this doctrine has acquired renewed and practical relevance.

II. Understanding “Mistake of Law” in Tax Context

A. Conceptual Meaning

“ Mistake of law” has been described in Black’s Law Dictionary (7th Edition) as a misunderstanding regarding the legal effect of known facts. In other words:

  • The factual circumstances are fully known;
  • The error arises in understanding how the law applies to those facts;
  • The person reaches an incorrect legal conclusion—often due to improper interpretation, confusion, reliance on departmental practice, or judicial uncertainty.

In tax matters, a classic example of mistake of law is where an assessee, believing a transaction to be taxable, pays GST even though the levy is later held to be unconstitutional, ultra vires, or otherwise inapplicable.

B. Illustrative Situations Under GST

Mistake of law in GST can arise, for instance, in the following ways:

  • Ambiguous statutory provisions leading to a bona fide belief that a transaction is taxable, though later clarified as non-taxable.
  • Departmental circulars or long-standing practice requiring tax payment contrary to the true meaning of the law.
  • Double payment or computational errors where GST is paid twice for the same supply due to misinterpretation of provisions.
  • Reliance on a levy subsequently struck down by a Court as unconstitutional, ultra vires the parent Act, or beyond delegated authority.

In all such cases, the payment is not voluntarily made in the sense of acknowledging a lawful tax liability; instead, it flows from an erroneous legal understanding. The crucial issue becomes: what is the legal character of such a payment, and how is refund to be governed?

III. Article 265 and the Principle of Restitution

A. Scope of Article 265

Article 265 of the Constitution declares:

“No tax shall be levied or collected except by authority of law.”

This provision operates at two distinct but connected stages:

  1. Levy – whether the tax is imposed by a valid law;
  2. Collection and retention – whether the act of taking and holding the amount has legal sanction.

Courts have repeatedly held that if there is no valid authority of law for either levy or collection, the State cannot constitutionally retain the money.

In S. Gopalan vs State of Madras (1958) 2 MLJ 117, the Hon’ble Madras High Court clarified that “law” for this purpose:

  • Must be enacted by a competent legislature;
  • Must not be hit by constitutional prohibitions such as Article 27, Article 276, Article 286, Article 301 etc.;
  • Must not infringe fundamental rights;
  • Must respect other constitutional limitations, including those under Article 301 and Article 304.