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.
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.
The income tax department may be pushing taxpayers to pay excess advance taxes to meet revenue targets, the Parliamentary standing committee on finance surmised, as it found that the interest components of the refunds distributed in the last financial years were high at over Rs 20,000 crore each.
The Central Board of Direct Taxes (CBDT), however, sought to rebut 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. “The government has incentivised payment of advance tax on time as any shortfall in the advance tax has to be paid as self-assessment tax including interest charged under section 234B and 234C of the Act,” CBDT said.
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 the assessee may avail later. “The higher TDS deducted in such cases is claimed as a refund by the taxpayer while filing his return of income,” the Board said.
The other factor that contributes to higher component of interest outgo on refund is the amount collected by the department on an assessment order that is challenged in appellate forums. In such cases, the assessee has to deposit 20% of the demand that is in dispute before approaching commissioner (appeals) or higher forums. However, if the appellate decision goes against the department, this amount is refunded to the taxpayer along with interest.
“Assessing officers have been directed to collect only 20% of the demand raised if an appeal has been filed before the commissioner (Appeals), inter-alia, to minimise the outgo of refunds and interest, in the event of an unfavourable appellate order,” CBDT said to the panel.