As part of its efforts to reform the government’s accounting system, the finance ministry is considering a proposal to pay interest on tax refunds from the Appropriation Account of the Centre. The idea is to bring interest on tax refunds in line with other interest payments of the government, which are classified under Non-Plan expenditure in the Budget..
Currently, refunds are paid by the revenue department from its tax receipts and the tax numbers reported by the finance ministry are net of refunds. The refunds also comprise interest component. On the other hand, other interest payments such as interest on government’s market borrowings and loans from multilateral institutions are considered expenditure.
“It has been proposed that the interest paid on refund should be shown as expenditure. The suggestion is that the amount should be paid from the Appropriation Account and not from tax receipts,” said a finance ministry official, who did not want to be identified.
Appropriation Account of the government is credited when appropriation for it is authorised in the Budget. Certified by the Comptroller and Auditor General (CAG), these provide the medium for the exercise of Parliamentary control on withdrawals from the Consolidated Fund of India.
A revenue official, however, said any change in accounting could lead to delay in processing of refunds as one would have to wait for Parliament’s nod to make a provision for them.
The CAG has also asked the finance ministry to report the numbers on interest paid on refunds and interest received on delayed tax payments while declaring tax collection figures.
A report by CAG had shown that while the number of refund cases has reduced over the last few years, the tax department in India was taking about a year on an average to finally refund the excess tax, compared with international average of 40 days.
| 2005-06 | 2006-07 | 2007-08 | 2008-09 | 2009-10 | |
| Total collection in corporate and income tax | 1,87,294 | 2,56,632 | 3,36,851 | 3,58,529 | 4,24,713 |
| Refunds including interest | 30,032 | 37,235 | 41,285 | 39,097 | 57,100 |
| Interest on refunds | 4,575 | 3,693 | 4,444 | 5,778 | 12,951 |
| Refunds as % of gross collection | 16.03 | 14.51 | 12.26 | 10.9 | 13.44 |
| Interest as % of refunds | 15.2 | 9.9 | 10.8 | 14.8 | 22.7 |
| Source: CAG Figures in Rs crore | |||||
The interest on refunds increased about threefold in three years up to 2009-10, whereas refunds did not increase at the same pace. The CAG had noted that pendency of refund claims was resulting in outflow of revenue from the government by way of interest.
The government refunded Rs 57,101 crore (13.4 per cent of tax collections) in 2009-10, which included interest to the tune of Rs 12,951 crore—about 22.7 per cent of the total refund amount. Refunds as per cent of gross corporate and income tax collections stood at 10.9, 12.2 and 14.5 in 2008-09, 2007-08 and 2006-07, respectively. Interest as per cent of refunds stood at 14.8, 10.8 and 9.9 in these years.
The finance ministry is now promoting electronic filing of returns to help faster processing. The Central Processing Centre (CPC) Bengaluru processed more than 85 lakh e-returns in 2010-11. Three more CPCs for tax returns are planned at Manesar, Pune and Kolkata. The finance ministry is expecting their operationalisation in due course would give a fillip to the processing capacity of the returns of income and help in processing the returns of income within four months of filing the return.
