D.S. Malik, Additional Director General, Ministry of Finance, New Delhi, writes:
The news report published on February 8, 2014, headlined ‘Finance Ministry pays Rs.37,365 crore in interest on excess tax refund’, stated that such a huge quantum of interest was paid by the government on refund of excess taxes between 2006-2007 and 2010-2011 as per a Public Accounts Committee report of January 31, 2014, and that the payments were without authorisation from Parliament.
The rate of interest and entitlement to interest on excess taxes are determined by the statutory provisions of the Income Tax Act, enacted by Parliament. Interest payment is a statutory obligation and non-discretionary in nature. Between 2006-2007 and 2010-2011, these constituted 14.5 per cent of all refunds. Such interest payment aggregated to Rs.21,263 crore during 2001-2002 to 2005-2006, constituting 20.79 per cent of refunds.
The government has been of the view that non-reflection of interest on refund separately as expenditure in the annual financial statement laid before Parliament did not violate any constitutional provision. The practice of not seeking specific appropriation for interest on refund as expenditure, and of treating it as reduction from gross tax revenue, has been followed since the Income Tax Act came into force in 1961, with an exception in the Budget Estimate (BE) for 2001-2002, where estimated interest was separately shown as expenditure. However, in the Revised Estimate for the same year (as presented in the Budget for 2002-2003), the interest was reduced to nil. No BE for such interest was given in the budgets for 2002-2003 onwards. The Attorney General for India in his opinion dated May 6, 2013, affirmed that refund on excess tax is not an expenditure under Article 112(1) of the Constitution and such outgo cannot be considered with other operational expenses. The PAC report of January 31 was laid before Parliament on February 6, 2014. The recommendations and observations will receive due consideration and responded to within six months of presentation as per requirement.