The desperate government with a chronic current account deficit problem seems to be shooting in every direction to find solutions. Unable to push through real reforms to check the widening fiscal deficit, the government now appears to have embarked on an initiative to give the numbers a window-dressing by holding on to legitimate direct and indirect tax refunds. Mayura Shanbaug reports on how this statistical jugglery hides the true picture and hurts the honest tax payer.
Income-tax commissioners have reportedly been asked by the finance ministry to go slow on income and other tax refunds. The result; thousands of Crores of rupees of refund are lying with the government, and the rationale is that it will inflate the tax collection figures and thereby help bridge the fiscal deficit.
According to a survey done by the apex industry body, Assocham, a few months ago, covering more than 200 companies, reveals that over 92% of companies say their refunds are delayed by over a year. Only 1% got refunds within three months.
Over 37% are not satisfied with the reasons given by the tax authorities for delay in refunds. Over 50% feel the process of tax refunds is very bad in India and about 22% companies had over Rs. 10 crore each in refunds due.
“It is a perennial problem; whatever we do we will never get our refunds on time. It will only be paid in the month of April or thereafter,” says Rajan Vora, Chairman, Direct Taxation Committee, and IMC. “The small and medium enterprises are the ones which suffer the most. Many of these have no money to pay their advance tax as they do not have their refunds to offset and on top of that, will have to pay the penalty for the delay in paying advance tax,’ he says.
According to K Jayaraman-Research Associate-Bonanza Portfolio, the delay affects the liquidity of SME and traders as they have refunds which are not received as yet while their advance tax has to be paid on time. “There is no way by which adjustment to net off the same is possible. In many cases company’s which operate on working capital loans will be put to severe strain due to advance tax payments even before their sale collections are made. Certainly for companies with debt burdens and outstanding in sundry debtors collection, this advance tax will be a severe pain to go through, all the more when refunds are not received for past years,” he says.
The income-tax department’s own numbers also bear out the same story. In the first two months of this fiscal, direct tax refunds stood at Rs. 16,900 crore compared with Rs. 37,500 crore last fiscal, down a whopping 54% on year. In 2010-11, there were 80 lakh cases of refund and the refund amount was Rs. 74,000 crore. In 2011-12, there were 1 crore cases and the refund was about Rs. 95,000 crore. Also, there are over 24,000 cases involving more than Rs. 1,925 crore pending in indirect tax refunds. Mumbai LTU unit has over 15,400 cases of disputed tax claim totalling more than Rs. 1000 crore in June that had big names of the industry. The current figures will also have the similar story and not differ much with the earlier ones.
There are several reasons given by the department for this; growing number of taxpayers, technical problems at the department, and many times, the department is ‘slow at work’.
“Normally corporate tax refund if followed up properly with all relevant proof for all claims and which are without disputes are received without much delay,” said T K Shah, Chief Commissioner of Income tax at an interactive meeting at IMC last week. “There may be cases where the returns are filed and there are some technical errors which are found out later then the amount is stuck with government. There may areas of dispute between our department and the corporates where the tax paid may be held back by us. Moreover, if the returns filed and assessments are completed on time then the process for refunds are also smooth and fast,” he said.
It works like this. Once a return is filed, the income tax department verifies the information and processes it, and refunds any excess paid. Ideally, a refund cheque is supposed to reach your mailing address in four months or can be credited to your bank account through the electronic clearing system or ECS.
Under the existing provisions of the Income Tax Act, the assessing officer cannot look into refund cases which are more than four years old.
In a given situation, the government will only delay refunds further and render the noble-intentioned electronic delivery system of tax refunds ineffective. For corporates struggling to keep the stake up as the economy grinds through global uncertainties and the rupee weakens with each passing day that spells more trouble.
“Tax payers are indeed concerned about the substantial refunds pending at the tax office on account of both Direct and Indirect taxes,” says RV Kanoria, President, FICCI in a pre budget memorandum to the finance ministry.
“There is a spiral here because there is a higher withholding tax and most often tax payers are unable to get lower tax withholding certificates because departments dealing with withholding tax and with assessments within the Tax Office are different and each has their own separate targets,” he says.
Kanoria further states that once higher taxes are withheld, there is a need for a refund and one finds, in practice, that tax offices make high pitched assessments to avoid refunds. “We thus get into prolonged litigation and a tax payer has major problems trying to get back funds which are legitimately his. A new internal instruction states that refunds will not be issued if a case is chosen for scrutiny,” he adds.
“There is a need to issue instructions or guidance for issue of lower or nil withholding certificates. We suggest that all pending refunds need to be granted forthwith, even when a case is chosen for scrutiny assessment,” he adds further. “This spiral needs to be broken..,” says Kanoria. But, the question which is still unanswered is ... how?
Mind-boggling Numbers
In the first two months of this fiscal, direct tax refunds stood at Rs. 16,900 crore compared with Rs. 37,500 crore last fiscal, down a whopping 54% year on year. In 2010-11, there were 80 lakh cases of refund and the refund amount was Rs. 74,000 crore. In 2011-12, there were one crore cases and the refund was about Rs. 95,000 crore. Also, there are over 24,000 cases involving more than Rs. 1,925 crore pending in indirect tax refunds. The Mumbai LTU unit had over 15,400 cases of disputed tax claim totalling more than Rs. 1000 crore in June that had big names of the industry. These numbers may have soared further since then.