The finance ministry may have to borrow more from the market this year because a higher refund outgo has left the revenue department with limited resources to meet the government’s short-term spending needs.
Looking at the possibility of a cash crunch, the ministry has asked the Income Tax department to stagger out the balance refunds during the remainder of the financial year.
The finance ministry is concerned that frontloading of refunds has squeezed the money out of the system, thereby putting pressure on the government to borrow from the market at high interest rates. This, at a time when the government was going for fiscal consolidation, ministry officials said. While the finance ministry pays six per cent a year on late payment for refunds, it has so far borrowed at 7.03 per cent to 8.30 per cent coupon rates from the market.
The government had said it would borrow Rs 2,50,000 crore during April-September — approximately is 60 per cent of the total budgeted market borrowing of Rs 4,17,000 crore for the financial year 2011-12. So far, it has borrowed Rs 60,000 crore and has announced the borrowing of another Rs 12,000 crore on May 27.
On whether the finance ministry would go slow on refunds, Revenue Secretary Sunil Mitra told Business Standard, it (refunds) should be moderated till December.
The Central Board of Direct Taxes’ (CBDT) refund drive has drastically pulled down net direct tax receipts in April. According to preliminary data available with the ministry, net direct tax collections fell sharply by 70 per cent to about Rs 4,000 during April 2011-12, compared with over Rs 14,000 crore in 2010-11.
A CBDT official, however, said higher refunds in April would not affect the government’s direct tax collection
target of Rs 5,32,651 crore this fiscal, 20 per cent higher than last year’s actual direct tax collections. The official said slowdown in economic growth might have some impact on revenue collections this year, but the refund exercise would help the department during the rest of the year, as there would not be too many pending claims unlike previous years.
Experts also said the refund drive might put pressure on the government to borrow, but it would not have any impact on its finances in the long-run. “It is the money which the tax department has to refund. Now they are going on an over drive but it is a short-term phenomenon. It may affect (government’s borrowing) in the first two quarters,” said Vikas Vasal, executive director, KPMG. Ernst & Young tax partner Prashant Khatore agreed that early payment of refunds should not be an issue for government finances as tax collections have remained buoyant so far.
The gross direct tax collections in April were about Rs 29,000 crore, about 15 per cent higher from April last year, but a refund outgo of about Rs 23,000 crore in about 20 lakh cases led to a decline in the net mop-up this year.
In 2010-11, direct tax receipts of the government totalled Rs 4,46,000 crore, despite the Income Tax department clearing refunds to the tune of Rs 74,000 crore in about 85 lakh cases, against Rs 57,000 crore in about 50 lakh cases in the previous year.
