Collecting Tax You Should 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 supplier charges 18% on a supply that turns out to be exempt. The customer paid it. The supplier deposited it. Everyone assumes the worst case is a refund claim.
It is not. Section 76 turns collected-but-not-payable tax into a liability of its own, with none of the protections that apply to an ordinary demand.
Section 32 prohibits an unregistered person from collecting any amount as tax, and a registered person from collecting tax otherwise than in accordance with the Act. Section 76 then requires every person who has collected any amount representing tax to pay it to the Government — whether or not the supply was taxable. There is no time limit on a s.76 demand, the amount cannot be adjusted against the person's other liability, and interest under s.50 runs from the date of collection.
What section 32 forbids
Two limbs.
s.32(1) — a person who is not a registered person shall not collect any amount by way of tax. That catches a business operating without registration that adds "GST" to its bills.
s.32(2) — a registered person shall not collect tax except in accordance with the provisions of this Act or the rules. That catches collection at the wrong rate, on an exempt supply, or on something that is not a supply at all.
Section 32 is a prohibition. Section 76 is the consequence.
Section 76 and why it bites harder than section 73 or 74A
"Notwithstanding anything to the contrary contained in any order or direction of any Appellate Authority or Appellate Tribunal or court or in any other provisions of this Act... every person who has collected from any other person any amount as representing the tax under this Act, and has not paid the said amount to the Government, shall forthwith pay the said amount to the Government, irrespective of whether the supplies in respect of which such amount was collected are taxable or not."
Four features distinguish it from an ordinary demand.
No time limit. Sections 73, 74 and 74A carry limitation periods running from the due date of the annual return. Section 76 has none. A collection from 2018 remains recoverable.
Taxability is irrelevant. The defence "there was no tax to collect" is precisely what the section forecloses. Establishing that the supply was exempt does not reduce the liability — it confirms it.
No adjustment. Section 76(4) makes the amount payable in addition to the person's other liability and it cannot be set off against credit or other dues.
Interest from collection. Interest under s.50 runs from the date of collection, not from a return due date.
The procedure
s.76(2) — the proper officer serves a notice requiring the person to show cause why the amount should not be paid and why a penalty equivalent to the amount should not be imposed.
s.76(3) — the officer determines the amount due after considering the representation, and s.76(6) requires the order within one year of the date of notice.
s.76(5) — an opportunity of hearing must be given where requested in writing or where a penalty is proposed.
s.76(8) — where the amount is found to be in excess of what was payable, the surplus is either credited to the Consumer Welfare Fund or refunded to the person who bore the incidence, on an application under s.54.
That last provision is the key to the whole scheme. The money belongs to the customer, not to the supplier and not to the Government.
The recipient's position
The person who actually bore the tax may apply for refund under s.54, subject to:
- the two-year limit from the relevant date;
- the unjust enrichment test in s.54(8) — the applicant must show the incidence was not passed on further;
- credit already availed being reversed, if any.
Where the recipient claimed input tax credit on the wrongly charged tax, a further problem arises. Section 16(2)(c) requires that the tax has actually been paid to the Government; and credit of an amount that was not leviable as tax is arguable at best. The prudent course for a recipient who discovers the supply was exempt is to reverse the credit and pursue the refund, not to defend the credit.
The related case: tax paid under the wrong head
Distinguish s.76 from s.77 read with s.19 of the IGST Act — where a supply treated as intra-State is later held inter-State, or vice versa. There the tax was payable, just under a different head. Section 77 allows refund of the wrongly paid tax without interest, and Rule 89(1A) gives the mechanism, with the two-year period running from the date of payment of the correct tax.
That is a benign correction. Section 76 is not.
Key takeaways
- s.32 bars collection of tax by an unregistered person, and by a registered person otherwise than under the Act.
- s.76 requires any amount collected as representing tax to be paid over, taxable or not.
- No limitation period applies to a s.76 demand.
- The amount cannot be adjusted against other liability, and interest runs from the date of collection.
- A penalty equal to the amount may be imposed; the order must issue within one year of notice.
- Excess goes to the Consumer Welfare Fund or is refunded to the person who bore the incidence.
Read next
- Absolute vs Conditional Exemption: Is Exemption Optional?
- Section 76 CGST Act: Tax Collected but Not Paid
- Section 77 CGST Act: Tax Wrongfully Collected and Paid
- Bill of Supply: When No GST Is Charged
Disclaimer: Positions stated as on 5 September 2026, based on ICAI Background Material on GST, Volume I and II (2026 edition).