Published 15 October 2026
Many Kerala traders still carry demands from the KVAT and KGST years: old assessment orders, revenue recovery notices, appeals that have sat for years. On 22 September 2026 the State GST Department issued Circular No. 2/2026-Kerala SGST with instructions for the Small Arrear Waiver Scheme, 2026, which wipes out an entire band of these arrears with interest and penalty. The same law, the Kerala Finance (No. 3) Act, 2026 (Act 12 of 2026), opened a separate settlement for Kerala Flood Cess arrears. Here is who qualifies, what is waived and what to do.
Who qualifies for the Small Arrear Waiver Scheme
Section 8 of the Act deems the entire amount of arrears of tax, cess, surcharge, interest or penalty covered by a specified order, together with interest accrued, to be settled where three conditions are all met:
- the arrears of tax or surcharge in the order are above ₹50,000 and do not exceed ₹2 lakh;
- the arrears relate to any financial year up to and including 2017-18; and
- the order was issued on or before 31 March 2027.
A specified order is any order raising a demand under one of six pre-GST laws: the Kerala Surcharge on Taxes Act, 1957, the Kerala General Sales Tax Act, 1963, the repealed Kerala Tax on Luxuries Act, 1976, the repealed Kerala Agricultural Income Tax Act, 1991, the repealed Kerala Value Added Tax Act, 2003, and the Central Sales Tax Act, 1956. Arrears up to ₹50,000 are the subject of the earlier special waiver for small arrears under section 13A of the General Amnesty Scheme, 2025, so the new scheme covers the next band up.
What counts as arrears, and what is excluded
- Amounts under a stay granted by any authority, tribunal or court are treated as pending collection, so stayed demands qualify.
- Partial payments made after the demand notice do not reduce the amount for testing the band; the demand-notice figure is used.
- Where the government's appeal is pending, the original order is the specified order, and the government must withdraw its appeal once the arrears are settled.
- Excluded: arrears payable under clause (b) of section 5(1), section 5(2) and section 7 of the KGST Act, the provisions the government describes as relating to the sale of liquor.
- No refunds: amounts already paid under the relevant Act are not refunded under any circumstances.
How settlement works under the circular
By an order of 21 July 2026 the Commissioner of State Tax constituted committees, chaired by Deputy Commissioners of State Tax (Arrear Recovery) or (Taxpayer Services Division), as the Designated Authorities. They identify and verify eligible cases and inform the assessing authority. A beneficiary who wants written proof applies in Form SAWS-1 for a Certificate of Settlement under section 11, one application for each specified order, and receives a Settlement Order in Form SAWS-2 and a Certificate in Form SAWS-3. The certificate is conclusive: no settled matter can be reopened in appeal, revision or review, though the Commissioner may revise a settlement order within two years. Revenue recovery proceedings for settled arrears are deemed withdrawn, with no collection charges.
The Flood Cess Arrears Settlement Scheme, 2026
Chapter IV of the same Act deals with the one per cent Kerala Flood Cess levied on B2C supplies from 1 August 2019 to 31 July 2021. A taxpayer with arrears for that period may pay the entire flood cess payable, by electronic payment through the e-treasury portal on or before 31 March 2027, and the interest and penalty stand waived. Where the full cess was already paid, interest and penalty are deemed waived. If a GST show cause notice combines flood cess with other demands, paying the flood cess settles that part only.
What to do now
- Collect every pre-GST assessment order and demand notice, including old KVAT and CST orders, and note the tax or surcharge amount in each.
- Sort them by band: up to ₹50,000, above ₹50,000 up to ₹2 lakh, and above ₹2 lakh. Only the middle band falls under the new scheme.
- Check for revenue recovery notices, attachments or appeals; these are the cases where a certificate matters most.
- Apply in Form SAWS-1 to the Designated Authority for a Certificate of Settlement for each qualifying order, and keep the SAWS-3 certificate with your records.
- For flood cess, compute the principal for August 2019 to July 2021 and pay it through e-treasury before 31 March 2027.
Frequently Asked Questions
Which arrears does Kerala's Small Arrear Waiver Scheme 2026 cover?
Arrears under six pre-GST laws, including KVAT, KGST and CST, where the tax or surcharge in the order is above ₹50,000 and up to ₹2 lakh, relates to years up to 2017-18, and the order was issued on or before 31 March 2027.
Is interest and penalty also waived?
Yes. The entire arrears of tax, cess, surcharge, interest or penalty covered by the specified order, plus interest accrued, are deemed settled.
Do I need to apply to get the waiver?
The settlement is deemed by the Act and Designated Authorities identify eligible cases, but a beneficiary should apply in Form SAWS-1 for a Certificate of Settlement for each order, which is conclusive proof.
Are liquor-related arrears covered?
No. Arrears payable under section 5(1)(b), section 5(2) and section 7 of the Kerala General Sales Tax Act, 1963 are excluded.
What is the deadline for the Flood Cess settlement?
Pay the entire flood cess for 1 August 2019 to 31 July 2021 electronically through e-treasury on or before 31 March 2027, and the interest and penalty are waived.
Sources
Kerala Finance (No. 3) Bill, 2026, Bill No. 1 of the Sixteenth Kerala Legislative Assembly, Chapters III and IV and Statement of Objects and Reasons, enacted as the Kerala Finance (No. 3) Act, 2026 (Act 12 of 2026); State GST Department, Circular No. 2/2026-Kerala SGST, File No. SGST/3429/2026-PLC9, 22 September 2026, with Forms SAWS-1 to SAWS-3.
BookMyTM helps Kerala traders trace old assessment orders, prepare SAWS-1 applications and settle flood cess arrears, alongside current GST compliance.