The Section 56 test that decides whether your GST refund interest is 6% or 9%.

Two exporters, one refund, and the 3% that divided the Supreme Court

When Willowood Chemicals and Saraf Natural Stone exported goods from Gujarat, they did what every GST-registered exporter does: they filed for a refund of the integrated tax they had paid on their zero-rated supplies. The government took its time—94 days in one case, 290 in another. The companies wanted interest on that delay. The Gujarat High Court gave them 9% per annum. The Supreme Court just cut it to 6%. The difference was three percentage points. But the principle behind it—whether a court can override a statutory interest rate with a higher equitable one—is worth every CFO and founder's attention.

What the exporters actually did

Both respondents were registered persons making zero-rated supplies under Section 16 of the Integrated Goods and Services Tax Act, 2017. They exported goods and claimed refunds of the integrated GST paid on those exports. The refund mechanism is governed by Section 54 of the Central Goods and Services Tax Act, 2017. The timeline for processing refunds is prescribed. The government missed it. By 94 days in one case, and by 290 in the other.

The companies moved the High Court of Gujarat at Ahmedabad under Article 226 of the Constitution. They wanted interest on the delayed refunds. The High Court, on 10 July 2019, allowed the writ petitions and awarded interest at 9% per annum from the date of filing GSTR-3B. The Union of India filed review petitions. They were dismissed on 13 March 2020. The Union then appealed to the Supreme Court.

The provision that split the High Court and the Supreme Court

Section 56 of the CGST Act is the provision that governs interest on delayed refunds. It has two parts. The principal provision says: if the government fails to grant a refund within sixty days from the date of receipt of the application, the applicant is entitled to interest at the rate of 6% per annum. The proviso says: where the refund arises from an order passed by an adjudicating authority, appellate authority, appellate tribunal, or court that has attained finality, the interest rate is 9% per annum.

The High Court read the proviso expansively. It held that since the refund claims were ultimately processed and sanctioned—even if not through a formal appellate order—the delay warranted the higher rate. The Supreme Court disagreed. The Bench, comprising Justice Uday Umesh Lalit (who authored the judgment) and Justice S. Ravindra Bhat, held that the refund claims in both cases arose from original applications under Section 54, not from any order of an adjudicating or appellate authority. The proviso simply did not apply. The correct rate was 6% under the principal provision.

What the Union argued—and why it won

The Union of India, represented by the learned Counsel, made a straightforward submission. The refund claims were original applications. No adjudicating authority, appellate authority, tribunal, or court had passed any order that had attained finality. The proviso to Section 56 was therefore not triggered. The only applicable rate was 6% under the principal provision. Since the government had already paid the refund amounts along with 6% interest during the pendency of the appeals, nothing further remained to be done.

The respondents, on the other hand, argued that the High Court had correctly applied the proviso. They relied on the principle that where a statute is silent on interest, courts can award interest at a reasonable rate on equitable grounds. They cited K.T. Plantation Pvt. Ltd. & Anr. v. State of Karnataka, (2011) 9 SCC 1, to argue that the right to compensation is inbuilt in the right to property. The Supreme Court distinguished that case. It arose in the context of constitutional validity of land acquisition statutes, not statutory interest rates under GST.

The precedent the Supreme Court actually followed

The Supreme Court did not write on a clean slate. It traced the law on interest on delayed refunds through a line of precedents. In Modi Industries Ltd. v. Commissioner of Income Tax, (1995) 6 SCC 396, the Court had held that there is no right to interest on refund except as provided by the statute. Interpretation should not assume interest must be paid whenever amounts become refundable.

In Godavari Sugar Mills Ltd. v. State of Maharashtra, the Court had held that where a statute specifies the interest rate, that rate governs. Equitable interest applies only where the statute is silent. The Court also held that a writ petition for interest on delayed payment is maintainable—settling the earlier contrary view in Union of India v. Orient Enterprises, (1998) 3 SCC 501.

In Sandvik Asia Ltd. v. Commissioner of Income Tax-I Pune, (2006) 2 SCC 508, the Court had awarded interest at 9% for an inordinate delay of 12-17 years in refund. But the Supreme Court in the present case explained that Sandvik was confined to its own facts. The delay there was extraordinary—decades, not months. The 9% was compensation, not statutory interest. Commissioner of Income Tax, Gujarat v. Gujarat Fluoro Chemicals, (2014) 1 SCC 126, later clarified that Sandvik directed compensation for inordinate delay in the specific facts of that case, not a general rule for 9% interest.

The Supreme Court distilled the principle: where a statute specifies or regulates the rate of interest on delayed refunds, interest is payable strictly in terms of the statutory provision. Courts cannot award interest at a rate exceeding the statutory prescription. Equity cannot override the statute.

The test the Supreme Court applied

The test was simple. Look at the source of the refund claim. If it arose from an original application under Section 54, the principal provision of Section 56 applies—6% per annum. If it arose from an order of an adjudicating authority, appellate authority, tribunal, or court that has attained finality, the proviso applies—9% per annum. The refund claims in both cases were original applications. The proviso did not apply. The High Court erred.

THE TEST: When a client asks about interest on delayed GST refunds, ask one question: did the refund arise from an original application under Section 54, or from an order of an adjudicating/appellate authority that has attained finality? The answer determines whether the rate is 6% or 9%.

Why this matters in practice

For advocates, this judgment is a clean application of the principle that statutory provisions on interest rates govern and equity cannot override them. The proviso to Section 56 is not a catch-all for every delayed refund. It is triggered only by a specific procedural event—an order from an adjudicating or appellate authority that has attained finality. If your client's refund claim is an original application, the rate is 6%, not 9%.

For CFOs and founders, the takeaway is equally practical. If your company exports goods and claims GST refunds, the government is obliged to process the refund within sixty days. If it delays, you are entitled to interest at 6% per annum. You cannot demand 9% unless the refund arises from an appellate or adjudicatory order. But the judgment also confirms that a writ petition under Article 226 seeking interest on delayed refund is maintainable. You have a remedy. The rate is just lower than you might have hoped.

The Supreme Court also left a door open. In Sandvik, the Court awarded 9% for a delay of 12-17 years. The present case involved delays of 94 to 290 days. The Court noted that such extraordinary circumstances did not arise here. But the obiter suggests that if a delay is truly extraordinary—far beyond mere months—a higher rate may still be available as compensation, not statutory interest. The threshold, however, is high.

The bottom line

If you are an exporter waiting for a GST refund, you are entitled to interest at 6% per annum on the delayed amount. Do not expect 9% unless the refund arises from an appellate or adjudicatory order. And if the government has already paid you 6%, the matter ends there—the Supreme Court has spoken.