Principle of Unjust Enrichment in Indian Tax Laws – A Consolidated, Law‑wise and Comparative Analysis

INTRODUCTION – UNJUST ENRICHMENT AS A CORE PRINCIPLE OF TAX EQUITY

The principle of unjust enrichment represents the moral and equitable foundation of refund jurisprudence in Indian tax laws. It ensures that tax administration does not merely follow legality in form but adheres to fairness in substance. The doctrine prevents a person from retaining a benefit that has been obtained at the cost of another, without lawful justification.

In the field of taxation, unjust enrichment assumes particular importance because taxes are often collected from one person but economically borne by another. This disconnect between the person who pays tax to the Government and the person who ultimately bears its burden creates the risk of double benefit when refunds are granted mechanically.

Indian courts have repeatedly emphasised that refund of tax is not an automatic consequence of illegality of levy. Refund is an equitable remedy. It must pass the test of unjust enrichment. This article presents a consolidated and coherent analysis of unjust enrichment across Indian tax laws, supported by judicial precedents, practical illustrations, and international comparison.

CONCEPT AND DEFINITION OF UNJUST ENRICHMENT

Unjust enrichment is a doctrine of equity recognised across legal systems. It is based on the principle that no person should be allowed to enrich himself unfairly at the expense of another. The doctrine intervenes when retention of a benefit violates fairness and good conscience.

Legally, unjust enrichment consists of four essential elements. There must be enrichment of one person. Such enrichment must be at the expense of another. The enrichment must be unjust. There must be no legal justification for retention of the benefit.

In taxation, unjust enrichment arises most prominently in indirect taxes. This is because indirect taxes are designed to be passed on. The person remitting tax to the Government is often not the person bearing its economic burden.

EQUITABLE FOUNDATIONS AND LATIN MAXIMS

The doctrine of unjust enrichment is deeply rooted in classical equitable principles. Indian courts frequently rely on Latin maxims to explain and justify its application in tax matters.

The maxim “Nemo debet locupletari ex aliena jactura” means that no one should be made rich by another’s loss. This principle squarely applies when an assessee seeks refund of tax already recovered from customers.

Another guiding maxim is “Ex aequo et bono”, meaning what is just and fair. Courts invoke this principle to ensure that refund provisions are interpreted in a manner consistent with equity rather than mechanical legality.

DISTINCTION BETWEEN DIRECT AND INDIRECT TAXES

A proper understanding of unjust enrichment requires appreciation of the distinction between direct and indirect taxes. Direct taxes, such as income tax, are levied directly on the person whose income is taxed. The incidence and burden usually rest on the same person.

Indirect taxes, such as excise duty, customs duty, service tax, VAT, and GST, are levied on transactions or supplies. Although the assessee pays tax to the Government, the economic burden is ordinarily passed on to the consumer through pricing mechanisms.

This fundamental distinction explains why unjust enrichment plays a dominant role in indirect tax refunds and a limited role in direct tax matters.

EVOLUTION OF UNJUST ENRICHMENT IN INDIAN TAX JURISPRUDENCE

Initially, Indian tax statutes did not expressly incorporate unjust enrichment. Refund provisions were interpreted largely in favour of taxpayers, even in cases where tax burden had been passed on.

Judicial experience revealed that such an approach resulted in windfall gains to assessees and injustice to consumers. Courts gradually introduced equitable considerations to restrict refunds.

This judicial evolution culminated in statutory incorporation of unjust enrichment in refund provisions of indirect tax laws, thereby aligning legislative intent with economic reality.

UNJUST ENRICHMENT UNDER CENTRAL EXCISE LAW

The Central Excise Act, 1944 represents the most developed application of unjust enrichment. Section 11B expressly provides that refund shall be granted only if the claimant establishes that the incidence of duty has not been passed on to any other person.

Excise duty, being a duty on manufacture, was almost always included in the sale price of goods. Manufacturers recovered the duty from buyers either explicitly or implicitly. Granting refunds without examining this aspect led to unjust gains.

The Constitution Bench judgment in Mafatlal Industries Ltd. v. Union of India settled the law conclusively. The Supreme Court held that all excise duty refunds, including those arising from unconstitutional levies, are subject to unjust enrichment.

A numerical illustration explains the application. A manufacturer sells goods at ₹1,00,000 plus excise duty of ₹12,000. Buyers pay ₹1,12,000. If duty is later held invalid, refund of ₹12,000 to the manufacturer would unjustly enrich him, as buyers have already borne the burden.

UNJUST ENRICHMENT AND CAPTIVE CONSUMPTION – SOLAR PESTICIDES CASE

A significant extension of the doctrine occurred in Solar Pesticides Pvt. Ltd. v. Union of India. The issue was whether unjust enrichment applies where excisable goods are captively consumed and not sold.

The Supreme Court held that even in captive consumption, duty forms part of the cost of production. This cost is ultimately recovered through pricing of final products. Therefore, unjust enrichment applies even without external sale.

This judgment reinforced the principle that unjust enrichment is based on economic incidence, not mere transactional form.

UNJUST ENRICHMENT UNDER CUSTOMS LAW

Section 27 of the Customs Act, 1962 incorporates unjust enrichment in refund provisions. Customs duty forms part of the landed cost of imported goods and directly influences resale prices or cost of production.

Importers typically recover customs duty either through higher resale prices or through pricing of finished goods manufactured using imported inputs. Refund of such duty without examining passing of burden would result in unjust enrichment.

For example, an importer pays customs duty of ₹20,00,000 on machinery. The machinery is capitalised and depreciation is claimed. The duty element is recovered through product pricing. Refund of such duty would unjustly enrich the importer.

UNJUST ENRICHMENT UNDER SERVICE TAX REGIME

Under the erstwhile service tax law, unjust enrichment applied with equal force. Service tax was usually charged separately on invoices and recovered from service recipients.

Courts examined contracts, invoices, and accounting treatment to determine whether service tax burden was passed on. Where service tax was recovered from clients, refund claims were denied.

However, where contracts were tax‑inclusive and service providers bore the tax burden themselves, refunds were allowed. This highlights the fact‑specific application of unjust enrichment.

UNJUST ENRICHMENT UNDER VAT (PRE‑GST REGIME)

Under State VAT laws, unjust enrichment was applied with varying degrees of clarity. Some State VAT statutes expressly incorporated the doctrine, while others relied on judicial interpretation.

Courts generally held that VAT, being a consumption tax, is passed on to purchasers. Refunds were denied where tax was collected from buyers and not returned.

The transition to GST brought uniformity and statutory clarity that was lacking under the VAT regime.

UNJUST ENRICHMENT UNDER GST LAW

The CGST Act, 2017 incorporates unjust enrichment as the general rule for refunds under Section 54. Refund is treated as an exception, subject to verification that tax incidence has not been passed on.

GST is transparently charged on invoices, making passing of tax burden more visible. Authorities examine whether tax was collected from recipients and whether prices were adjusted subsequently.

Section 54(8) identifies specific exceptions, such as exports and refund of excess cash ledger balance, where unjust enrichment does not apply.

INVERTED DUTY STRUCTURE AND GST REFUNDS

In inverted duty structure cases, suppliers accumulate input tax credit due to higher tax rates on inputs. Refund of such accumulated credit is permitted, subject to unjust enrichment checks.

Authorities examine whether output prices absorbed excess tax or whether the burden was passed on. Where suppliers demonstrate that excess tax remained embedded in cost, refunds may be allowed.

This reflects a nuanced and pragmatic application of unjust enrichment under GST.

ROLE OF ACCOUNTING TREATMENT AND CA CERTIFICATION

Accounting treatment is a critical determinant in unjust enrichment analysis. Courts and authorities closely examine how tax has been reflected in books of account.

If tax is shown as an expense, it indicates that the assessee has borne the burden. If shown as recoverable or included in inventory valuation, it suggests passing on.

Chartered Accountant certificates, though relevant, are not conclusive. They must be supported by consistent accounting records and commercial evidence.

BURDEN OF PROOF AND EVIDENTIARY REQUIREMENTS

The burden of proving absence of unjust enrichment lies squarely on the claimant. This burden is substantive and not merely procedural.

Evidence may include invoices, pricing policies, cost sheets, balance sheets, profit and loss accounts, and market conditions. Authorities evaluate evidence holistically.

Mere assertions or isolated certificates are insufficient to discharge this burden.

CONSUMER WELFARE FUND MECHANISM

Where unjust enrichment is established, refund amounts are credited to the Consumer Welfare Fund. This ensures that money collected from consumers is not returned unjustly to assessees.

The Fund is utilised for consumer awareness and welfare activities. Thus, even when refund is denied to the claimant, the benefit flows back to society.

This mechanism reinforces the equity‑based nature of the doctrine in India.

LIMITED APPLICATION UNDER INCOME TAX LAW

Income tax, being a direct tax, does not ordinarily involve unjust enrichment. The person paying tax and bearing its burden are generally the same.

However, equitable considerations arise in limited situations such as tax deducted at source. Courts ensure that refunds do not result in double benefits.

Thus, while unjust enrichment is not dominant under income tax law, its equitable spirit still guides judicial discretion.

INTERNATIONAL PERSPECTIVE – EUROPEAN UNION

In the European Union, unjust enrichment is recognised as a general principle of VAT law. Refunds may be denied where repayment would unjustly enrich the claimant.

The European Court of Justice allows member states to deny refunds if VAT has been passed on, subject to procedural safeguards. Consumer protection and fiscal neutrality guide the approach.

Indian GST law aligns closely with this model in principle, though implementation mechanisms differ.

INTERNATIONAL PERSPECTIVE – UNITED KINGDOM

UK VAT law recognises unjust enrichment as a defence available to tax authorities. Refunds may be denied if the claimant has passed on VAT to customers.

However, UK law allows refunds where claimants demonstrate reimbursement to customers. This flexible restitution‑based approach contrasts with India’s Consumer Welfare Fund mechanism.

INTERNATIONAL PERSPECTIVE – AUSTRALIA

Australian GST law also incorporates unjust enrichment principles. Refunds are denied where tax has been passed on, unless the claimant refunds the amount to customers.

The Australian model focuses on correcting enrichment rather than forfeiting amounts to the State. This represents a softer and more restitution‑oriented approach.

COMPARATIVE ANALYSIS – INDIA AND INTERNATIONAL PRACTICE

India adopts a stricter statutory framework with mandatory credit to the Consumer Welfare Fund. International systems place greater emphasis on restitution to consumers.

Indian courts prioritise administrative certainty and revenue protection. Foreign jurisdictions often focus on taxpayer neutrality and corrective justice.

Despite differences, the underlying principle remains universal: no person should unjustly profit from tax refunds.

ROLE OF CHARTERED ACCOUNTANTS ACROSS TAX LAWS

Chartered Accountants play a central role in unjust enrichment analysis. They advise on pricing, contracts, accounting treatment, and evidentiary documentation.

Their certification carries professional responsibility. Mechanical or unsupported certifications can lead to refund rejection and professional exposure.

A law‑wise understanding of unjust enrichment enables CAs to provide defensible, ethical, and commercially sound advice.

CONCLUSION – UNJUST ENRICHMENT AS A UNIFYING TAX DOCTRINE

Unjust enrichment operates as a unifying doctrine across Indian tax laws. While its application varies across excise, customs, GST, and income tax, the underlying equity remains constant.

Indian jurisprudence has developed a coherent and robust framework that balances taxpayer rights with consumer and public interest.

For Chartered Accountants, mastery of unjust enrichment is essential. It reflects not only technical competence but also adherence to the equitable foundations of tax law.