The finance ministry is considering a proposal to do away with interest payment on income tax refunds to companies. This at a time companies have asked the revenue department to increase the rate in view of higher bank rates.
The ministry is also exploring the possibility of linking the rate with the call money rate, which is what banks pay each other for short-term borrowings.
The proposal, at a nascent stage, comes in the wake of concerns that companies park excess funds with the government to benefit from higher refund rates when call money rates are low.
| GAINING FROM GOVT | |
| 2011-12 | Average call |
The government pays 0.5 per cent per month, or six per cent per annum, on tax refunds. It charges 12 per cent a year on late tax payments.
In 2010-11, the Income Tax Department paid a refund of Rs 74,000 crore, higher than the Rs 57,000 crore in 2009-10. The refund paid in 2010-11 included dues of 2009-10, when call money rates were around three per cent. This year, the refunds have already crossed Rs 50,000 crore, due to electronic filing and faster processing. Not surprisingly, the call money rate is over 7 per cent.
Revenue department officials, however, denied any link between call money rates and higher refunds due to excess advance tax payments.
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“No company wants to park idle money with the government when it can use it for business expansion. It will make more sense to open a fixed deposit with a bank,” said an official.
Out of Rs 3 lakh crore corporation tax paid in 2010-11, Rs 1 lakh crore was paid in the last quarter (January-March). Out of Rs 74,000 crore refund last year, Rs 55,000 crore went to companies. This means almost half the tax paid by companies in the fourth quarter was returned to them.
The argument in favour of not paying interest on refunds is that companies are in a position to assess their tax liability when they pay the last installment of advance tax in March. The counter view is that the refunds include excess tax deducted at source (TDS), which is not in the hands of taxpayers.
“One option is to pay interest on TDS and do away with interest on advance tax payments,” said an official.
Ministry officials said they did not have the break-up on advance tax and TDS refunds. They said they had sought this data to better understand the issue.
The rate of interest on refunds was 18 per cent per annum in 1991, while the government charged 24 per cent on late tax payments. The rate was reduced to 12 per cent in 2001 and nine per cent in 2002.
The rate for late payment was brought down to 18 per cent in 2001 and 15 per cent in 2002. Since 2004, the rates have been at six per cent and 12 per cent, respectively. Some developed countries such as the UK, the US and Australia did not pay interest on refunds, said Rajshree Sabnavis, partner, BMR Advisors.