The Parliamentary standing committee on finance has found that the interest components of the refunds distributed in the last financial years were high at over Rs 20,000 crore each, indicative of IT department pushing taxpayers to pay excess advance taxes to meet revenue targets.
However, the Central Board of Direct Taxes (CBDT) has refuted the panel’s view, citing that advance tax and tax deducted at source (TDS) could often be higher than the final tax liability.
In the April-January period of the financial year 2019-20, the I-T department had refunded Rs 1.71 lakh crore, which included interest outgo of Rs 22,856 crore. Similarly, in the previous financial year, Rs 1.61 lakh crore was returned to taxpayers as refund consisting of Rs 20,566 crore as interest payment.
“This raises an apprehension that the assesses may be constrained to pay excess advance tax to fulfil revenue targets of the department. Such over-estimation automatically result in large amount of tax refunds along with accruing interest on refunds,” the panel’s report on Demands for Grants (2020-21) observed.
CBDT, in its response, said advance tax payment was based on estimated income for the financial year, and in many instances the taxpayer may end up claiming deduction and exemptions not factored in earlier in the year. In many cases, this leads to a reduction in tax liability and makes the taxpayer eligible for refund, which is then be paid back with interest on the amount.
Further, taxpayers tend to pay excess advance tax than the estimated eventual liability to avoid having to file self-assessed tax along with interest in case advance tax payment falls short of the final amount.
Similarly, the TDS payment made by taxpayers is often higher, given that withholding tax is applied on gross payments, which doesn’t factor in deduction or exemptions .
