Tax deduction at source (TDS) is desirable on interest paid on income tax refund – as an alternative Central Government may pay interest at reduced rate and make interest tax free.

[C.A. DEV KUMAR KOTHARI]

For benefit of revenue:

Reference Section 194A- see clause (viii) of sub-section (3)  which exempt TDS.

Interest paid by Central Government on direct tax refunds- exemption from TDS:

Substantial amount of interest is paid by government of India on refunds of direct taxes found due to assessee. The main cases of refunds are under the Income-tax Act, in case of Wealth Tax there are few cases of refund and payment of interest.  However, at present there is no TDS in case of interest payable on refund of direct tax under the provisions of Income-tax Act,1961 and Wealth –tax Act and others that is  Estate Duty, Gift Tax, Super Profit Tax, and Companies (Profits) Surcharge and  Interest Tax. However, they are of not much relevance now. There may be some cases of refund under those enactments, where taxpayer wins in appeal and get a refund of excessive tax paid or collected.

The exemption from TDS on interest payable on refund of these direct taxes is found in section clause (viii) of sub-section (3) of section 194A (3).

Refund on Income Tax :

Main reason of substantial refund of income-tax are  (a)  TDS at higher rate, (b)  starting collection of advance tax in early part of  the previous year (15^th June in case of companies, and 15^th September in case of others)  (c) higher rate of interest payable by assessee in case of shortfall in payment of advance tax and self assessment tax and  (d)  difficulties and harassment in getting certificate for lower TDS and (e) safe approach of taxpayers to play safe and thus allowing TDS at higher rate  etc.

We find that the main reason of refund is higher TDS. This is because advance tax and self assessment tax are paid by assessee after proper estimates. Sometimes even  higher tax paid by way of installment of advance tax is contributory for refund. This is for the reason that assessee might have paid tax  in advance and later suffer loss or is able to make investments in tax saving investment which he could not plan earlier.   Refund against self assessment tax paid by assessee is rare. Such refund arises only when due to mistake self assessment tax was paid on higher side and later it is noticed that there was mistake.

 Refund on Wealth Tax:

Wealth tax is paid at the time of self assessment. Therefore, cases of refund of wealth tax are not many. Refunds arise only in case of tax paid by mistake, or  collected due to wrong assessment and becoming refundable on winning in appeal by assessee. Therefore, exemption from TDS on refund of wealth tax may continue.

TDS is desirable from interest payable under the Income Tax Act:

In view of substantial interest being paid every year on income-tax refunds, it is desirable that tax should be deducted at source at the time of actual payment of interest on income tax refunds. Provisions in this regard can be made on the following lines:

The Assessing Officer or the refund banker on behalf of the Assessing Officer shall deduct income-tax from the amount of interest actually paid on income-tax refund, at the time of issuance of cheque for refund, at the following rates:

In the case of assesses being company, firms, and co-operative society  @ 15% where interest being actually paid at the time of any  refund by issuance of cheque  exceeds Rs.15000/-.

In the case of any other assessee  @ 10% where interest being actually paid at the time of any refund by issuance of cheque  exceeds Rs.50000/-.

The above TDS provisions will  be simple to work out as the AO or refund banker will have to simply check the amount of interest being paid at the particular  time of issuance of cheque, without consideration of number of assessment years involved or interest already paid earlier for  the same assessment year or during the same previous year.
With process of refund computerized, there will not be difficulty in implementing TDS on income-tax refund in above mentioned simple manner.

Advantage for assessee:

The assessee shall also be in advantageous position because TDS on interest paid on income tax refund will be considered for computation of even first installments of advance tax, and therefore, when interest is actually received in later part of the previous year, the assessee shall not be liable to pay interest for delay in deposit of installment of advance tax. In absence of TDS assessee becomes liable to pay installment of advance tax even if the income by way of interest on income tax refund is received in later part of the previous year.

For example, suppose a company has no other income but receive refund of income tax  say Rs.50 lakh and interest  of Rs.5 lakh  on such refund  during last week of March of the previous year that is after lapse of even last installment date (15^th March) for paying advance tax. Income tax payable on thie interest is say  Rs.1,50,000/-. The assessee could not pay installment of advance tax as refund of tax and interest was un-expected and in fact income is received on 20^th March. Though assessee received cheque for refund on say 20^th March however, he is supposed to pay installments of advance tax on 15^th June, September and December of preceding calendar year and 15^th March of current calendar year comprising within the previous year ending of 31^st March. For failure to deposit installments of advance and also for deferment of payment of advance tax  assessee company is liable to interest u/s 234B and 234C.

 If tax is deducted from interest, the assessee shall have some relief from interest payable because TDS of Rs. 75000/- will be adjusted against installments of advance tax payable by assessee and interest burden will be reduced. Assessee  will have to pay interest u/s 234B and 234C  because advance e tax is not paid by him.

Other alternative- exempt interest:

Other alternative which can be considered is that interest payable by the Central Government on refund of any direct and indirect taxes be exempted and in consideration of such exemption rate of interest payable by the Central Government can be reduced. At present rate of interest payable u/s 244A on income-tax refunds is  0.5% per month that is 6% per annum. To make such interest the rate of interest can be reduced to 5% per annum  in case of companies, firms and co-operative societies and  @5.5% per annum  in case of any other assessee.  

The reduced rate of interest with benefit of exemption can be applied even in cases where government pays interest on bonds, saving certificates, refund under other indirect tax enactments.