FEBRUARY 15, 2014

By TIOL Edit Team

THE Public Accounts Committee's (PAC's) report on ‘Contravention of Constitutional Provisions by Ministry of Finance: Expenditure incurred on Interest on Refunds without Parliamentary Approval' should serve as a springboard for reforms. It should pave way for improving the entire process of refund of taxes, tax credits, duty drawback, subsidies and other payments.

The Report should also serve as an opportunity for budgetary reforms with a focus on transparency and public accountability. Such initiatives would improve the business climate. They would also reduce lobbying and underlying corruption in securing refunds. The reforms would also reduce the litigation over delayed refunds. A spin-off benefit of such initiatives would be impart of credibility to the fiscal and revenue deficits.

What applies to the Centre on this count equally applies to the States, some of which have earned notoriety for delayed payment of subsidies to power distribution companies, driving them to brink of disaster.

In its report presented to Parliament on 6th February 2014, PAC rightly advised Finance Ministry “to scrupulously abide by Constitutional provisions and cautioned them to desist from taking precipitous action which even remotely tinkers with, dilutes or negates Parliamentary control over public purse in any manner.”

The Committee has also suggested that the Ministry seek ex ante or ex post facto Parliamentary approval for interest payments on tax refunds as the Constitution leaves no doubt about the manner of authorization of expenditure or withdrawal of moneys from and out of the Consolidated Fund of India other than seeking ex ante approval under Article 114 and 115(1)(a) or seeking ex post facto approval of Parliament under Article 115(1)(b) of the Constitution.

The Ministry/CBDT incurred an expenditure on interest on refunds amounting to Rs 10,499 crore in 2010-11. And the total expenditure it incurred on this count was Rs 37,365 crore over a period of five years ending 2010-11.

The Ministry has so far been classifying interest on refund of taxes as ‘reduction in revenue' instead of treating it as an item of expenditure. It nets off interest on refunds from tax receipts rather than including this expenditure item in the Budget Estimates.

PAC deserves kudos for reminding the Ministry that it earlier used to make a separate appropriation for interest payment on excess tax refund. This accounting practices needs to be revived and articulated.

There is a need for not only prior parliamentary approval for expenditure incurred on interest payments on income tax refunds but also need for taking a holistic view on the refunds.

The Government must disclose to what extent the fiscal deficit management compels it to delay refunds and thus bear interest on delayed payments. It should also reveal as to whether and to what extent the companies park their surplus cash as excess income tax payments.

The Government should consider the larger domain of delay in all sorts of payments to numerous entities. As Government has ubiquitous presence in business transactions, it ought to lay down a clear-cut policy on refund of interest on all delayed payments to different stakeholders especially the corporate sector. This should cover tax refunds, subsidies arrears and numerous delayed payments to individuals. Ideally, any delay of over 30 days on the part of Government in making a due payment should attract interest at the average prime lending rate of the banks.

The Government at present does not pay interest on subsidy arrears. This is a big issue for the entire fertilizer sector and for public sector oil marketing companies.

The Fertiliser Association of India (FAI), which is fighting a case against the Government on this issue in a high court, has done its home work well.

According to FAI, the impact of interest cost on pending subsidy bills of the order of Rs.32,000 crore comes to about Rs.1600 crore at a conservative interest rate of 10% per annum if the amount remains pending for six months.

It has rightly contended that “the Government must make a provision for payment of interest on all pending subsidy and freight bills beyond 45 days.”

Non-payment of interest or inadequate payment of interest on arrears amounts to levy of hidden cess or tax on governed entities. And delayed payments constitute covert Government borrowings. This must stop.

Time has come for the authorities, at all the three tiers of governance including local government bodies, to desist from spreading their fiscal ills to other sections of the economy.