When Can GST Refunds Be Withheld? The Real Scope of Section 54(11)

When Can GST Refunds Be Withheld? The Real Scope of Section 54(11)

Timely refunds are crucial for businesses’ working capital under GST. While Section 54 of the CGST Act lays down the refund process, Section 54(11) permits withholding refunds-but only under very specific, exceptional conditions.

Unfortunately, this power is often misunderstood as a routine tool for delay. But Section 54(11) is not meant to operate by default-it is a guardrail, to be used only when two specific conditions are satisfied. This article breaks down the provision, its true scope, judicial guidance, and common practical issues.

Section 54(11) of the CGST Act: What It Actually Says

The text of Section 54(11) is as follows:

"(11) Where an order giving rise to a refund is the subject matter of an appeal or further proceedings or where any other proceedings under this Act is pending and the Commissioner is of the opinion that grant of such refund is likely to adversely affect the revenue in the said appeal or other proceedings on account of malfeasance or fraud committed, he may, after giving the taxable person an opportunity of being heard, withhold the refund till such time as he may determine."

At its core, Section 54(11) is conditional and conjunctive in nature. It permits withholding of a refund only when both the following conditions are met:

1. An appeal or further proceedings arise from the refund order, or other proceedings under the GST Act are pending in relation to the taxpayer; and

2. The Commissioner believes that granting such refund is likely to adversely affect the revenue due to malfeasance or fraud.

Additionally, the taxpayer must be given an opportunity of being heard before withholding the refund, ensuring principles of natural justice are met.

Reading the Language Right: What the Provision Really Means

"Where an order giving rise to a refund is the subject matter of an appeal or further proceedings"- this phrase refers to situations where the actual order sanctioning the refund is under challenge, either in appeal or other judicial proceedings. In other words, the decision that creates the refund entitlement is itself under scrutiny.

Importantly, it’s not enough that there is an intention or a mere decision to appeal - the proceedings must be actively pending for Section 54(11) to apply.

The department may initiate an appeal, review, revision, or other proceedings if it believes the refund was wrongly sanctioned or obtained in violation of the law. This makes clear that even a sanctioned refund may not be conclusive if the matter is being contested.

Section 54(11) empowers the proper officer to withhold the refund temporarily, provided:

1. The refund order is under appeal or other proceedings, and

2. There are recorded reasons to believe that granting the refund would adversely affect the revenue’s interest.

Thus, while a taxpayer may consider a refund sanction as final, Section 54(11) introduces a statutory exception - the refund can remain in abeyance until the related proceedings conclude. Both conditions, however, must be met concurrently: simply citing a pending case is not enough; the officer must also demonstrate and record a reasoned apprehension of revenue loss.

Why This Matters: More Than a Routine Power

Understanding the legal framework is essential, but it’s equally important to grasp the real-world consequences of how this provision is applied-because it directly affects taxpayers’ finances and trust in the system.

Section 54(11) may appear procedural, but it has serious financial implications for taxpayers-it affects liquidity and disrupts financial planning.
When invoked, it doesn’t just delay the refund-it effectively denies access to funds for an uncertain period, impacting working capital and taxpayer confidence.
Unlike provisions dealing with ineligible or unverified refunds, Section 54(11) presumes the refund is otherwise admissible but still permits withholding due to pending proceedings.
The power is substantive, not routine-meant to be used cautiously, not mechanically or without proper justification.
A mechanical or unjustified invocation can cause serious hardship and violate natural justice principles.

This makes judicial scrutiny vital, as courts have stepped in to ensure that such powers are exercised with accountability and fairness.

Judicial Take: Department Cannot Withhold Refunds on Mere Intention to Appeal

Truth Fashion v. Commissioner of DGST, [2025(02)LCX0366]- Delhi High Court

In this case, the petitioner sought enforcement of a refund order dated 10.05.2024, which had been allowed by the Objection Hearing Authority. Despite a clear direction from the Delhi High Court in earlier proceedings, disposed on 18.11.2024, wherein the respondent was required to process the refund expeditiously within three weeks, the refund remained withheld.

The respondent justified the delay by invoking Section 54(11) of the CGST Act, claiming that the Commissioner had decided to file an appeal against the refund order and thus the refund could be withheld.

The Court rejected this argument, holding that:

Section 54(11) contemplates withholding of refund only if the order granting refund is already the subject of an appeal or other proceedings and the Commissioner forms an opinion (after hearing the taxpayer) that releasing the refund would adversely affect revenue due to fraud or malfeasance.
A mere decision to appeal does not satisfy the statutory requirement.
An appellate order remains binding unless stayed by a competent court.
The department cannot delay implementation of such orders based on its intent to challenge them.

Relying on the earlier decision in Alex Tour & Travel (P) Ltd. v. Commissioner (CGST), the Court reiterated that departmental inaction cannot defeat a taxpayer’s lawful entitlement.

Accordingly, the High Court directed the department to forthwith release the refund along with statutory interest under Section 56, and clarified that the pendency or intention to file an appeal does not justify withholding the refund in law.

Shalender Kumar v. Commissioner Delhi West CGST Commissionerate [2025(04)LCX0192] - Delhi High Court

Another decision by the Delhi High Court further clarified the limited scope for withholding refunds under Section 54(11). This judgment is particularly significant as it addresses unjustified withholding despite a favorable appellate order and absence of any pending appeal. In this case, the petitioner, a registered exporter of FMCGs, was granted a refund by the Appellate Authority, which found the claim to be genuine and in compliance with Section 16(2) of the CGST Act. The Appellate Authority held that the adjudicating authority had wrongly rejected the refund on grounds not supported by statute or jurisprudence. Accordingly, the refund of ₹18,15,500/- was allowed in appeal. However, instead of processing the refund, the Department issued a Review Order under Section 112(3) and simultaneously issued an order under Section 54(11) to withhold the refund, citing that granting the refund would adversely affect revenue due to alleged malfeasance. The Delhi High Court strongly rebuked this action. It held that Section 54(11) allows withholding only if two conditions are met:

1. The refund-granting order is subject matter of an appeal or other proceeding pending under the Act.

2. The Commissioner has opined that the refund, if granted, will adversely affect revenue, particularly due to fraud or malfeasance.

Crucially, the Court found that no appeal had actually been filed-the Department merely expressed an intention to appeal but had not done so due to the non-functioning of the GST Appellate Tribunal. As such, the Court ruled:

"The Department’s opinion under Section 54(11) cannot be relied upon on a standalone basis. In the absence of an appeal or any other proceeding pending, challenging the order of the Appellate Authority, the opinion under Section 54(11) cannot result in holding back the refund."

The Court also reaffirmed its earlier decision in G.S. Industries v. Commissioner Central Goods and Services Tax Delhi West &Ors. [W.P.(C) 14719/2022], where it had held that once an appellate authority has allowed a refund claim and the order-in-appeal is not stayed or challenged, the department cannot withhold the refund merely on the ground that it intends to file an appeal. The Court directed the department to process the refund along with interest, while clarifying that the department remains free to challenge the order-in-appeal and recover the refund later if it succeeds in such challenge.

This decision strengthens the position that refunds sanctioned by appellate authorities must be processed expeditiously, and mere departmental apprehensions, without actual pending proceedings, cannot justify withholding under Section 54(11). It protects taxpayer rights and affirms that the executive must act in compliance with binding appellate orders unless they are stayed or overturned by a higher forum.

In summary, these judgments reinforce that the mere intention or decision to appeal cannot be used as a tool by the department to withhold legitimate GST refunds. Refunds allowed by appellate authorities must be promptly released along with statutory interest, ensuring that taxpayer rights are protected and the principle of timely justice is upheld. Departments must follow binding orders and cannot delay refunds absent a valid, pending appeal or proven risk of revenue loss due to fraud.

Conclusion: Refund Withholding Must Be the Exception, Not the Norm

Section 54(11) is a limited and conditional power to withhold refunds, meant to prevent revenue loss only when strict criteria are met. Courts have made it clear that mere intention to appeal or departmental opinion is not enough-there must be a pending proceeding and a reasoned belief of fraud or malfeasance. This protects taxpayers’ right to timely refunds while allowing the department to act against genuine risks. Proper use of this provision ensures fairness and prevents misuse or undue delay.

Let discretion never be a disguise for delay.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.