TIOL - COB( WEB) - 383
FEBRUARY 13, 2014

By Shailendra Kumar, Editor

THE Indian Parliament is the sanctum sanctorum of all the democratic institutions in the country. The history of its inception is unmatched from the perspective of its glory and dignity which it realised in the first 15 years itself. But then came a phase of corrosion. And such a process of corrosion continues unabated and unabashedly even today! Let's take the case of yesterday's incident. Six of UPA Government Ministers hailing from Seemandhra Region of Andhra Pradesh wanted to register their protest against the 'political surgery' of their State. They trooped into the 'Well' of the House and forced the Railway Minister to cut short his presentation of Interim Railway Budget. Reacting to it the Prime Minister, Dr Manmohan Singh, said, "My heart bleeds to see what is happening in the House." If we look for more instances there are indeed numerous and certainly more gory - for instance, the much talked about Cash-for-Votes Scam is one of them.

Let's now look through a different 'window' at this unhalted decline. So far as the financial management of the country is concerned, none can challenge the legislative supremacy in our bicameral political system. The Executive is just one of the arms which is accountable to the Sansad for all its activities, including the financial ones. In this Constitutional backdrop let's now visit the latest Public Accounts Committee (PAC) Report on interest on refund sanctioned by the Department of Revenue in particular the Central Board of Direct Taxes (CBDT). This may sound like an ancient issue to many of TIOL Netizens but based on the CAG Reports the PAC had never furnished such a detailed and damning Report against the Ministry of Finance, the offices of the Attorney General and the Law Secretary.

In a nutshell, the issue is - The CBDT has bypassed the Parliament (particularly the Lok Sabha as it is relating to money matters) by creating an unsanctioned charge on the Consolidated Fund of India (CFI) for paying interest on tax refund. The point which has been made by the PAC is that the present practice of reducing the sum of refund from the total tax receipt is fine but interest on delayed payment of refund qualifies as an expenditure for which the CBDT had never taken the Parliamentary approval through the Appropriation Act. Thus, withdrawal of all the interest payments as much as over Rs 37000 Cr between 2006-2011, has been illegitimate and sans the House approval. Before forming such a view the PAC had invited the Attorney General of India who had apparently endorsed the line of thinking in the Committee and had stated that a Constitutional wrong has been committed by the North Block.

But then came a phase of intense pressure and ministerial interaction which apparently compelled the Attorney General to revise his opinion and endorse the Departmental view - "The interest payment on refund has no correlation with the earning of revenue and, therefore, it cannot be related in any way with the performance of revenue. Moreover, the amount of excess tax is retained in the Consolidated Fund and not by the Income Tax Department and, therefore, the interest outgo on such refunds can neither be an expenditure of the Income Tax Department nor a part of cost of collection”.

Such a somersault by the AG literally irked the PAC headed by the veteran Parliamentarian, Dr Murli Manohar Joshi, who apparently issued summons to the top brass in the Ministry of Law and the AG. The Law Secretary apparently referred to some O & M Instructions which permit the AG to revise the opinion in view of some decisions of the Supreme Court or High Courts which were not available earlier. When the PAC confronted the Secretary to provide details of the judicial decisions which were not available earlier, the Law Secretary finally admitted that it was done on the request of Ministry of Finance. While answering questions before the Committee the AG also had a tough time to convince the Members and he finally admitted that it was in contravention of Article 114(3) of the Constitution.

And the PAC finally noted: "The Committee are of the considered view that the role of the Ministry of Law and Justice should not be limited merely to pass on the information in a routine manner from any Ministry to the AG as had been done in this case. In view of the importance of the issue, the Ministry should have done comparative analysis of the earlier opinion of the AG and the Statement of the Case put up to them by the Department of Revenue and after taking into consideration the supremacy of the Constitutional provisions, the case should have been presented before the AG."

Let's now also visit what more the CBDT has to say: "Article 265 of the Constitution of India states that taxes cannot be imposed, save by the authority of law. In view of the same, the State is not authorized to collect "excess” tax. Refund under the provisions of the Income Tax Act constitutes "excess” tax paid by the taxpayer. The said amount being in excess of the tax liability duly computed under the provisions of the Income Tax Act is required to be refunded as per the procedure under Income Tax Act along with the interest arising thereon ... the tax paid by the assessee must be accepted as it is, and in the event of the tax paid being in excess of the tax liability duly computed on the basis of return furnished and the rates applicable, the excess shall be refunded to the assessee, since its retention may offend Article 265 of the Constitution ... Therefore, it may not be correct to classify refund of excess tax as expenditure, and hence such refund does not call for appropriation under Article 114 of the Constitution."

The PAC finds the CBDT's argument evidently specious and untenable. And if one reads the wordings of relevant Articles of 112(1), 114(3), 115, 117, 118(2), 119 & 266(3) of our Constitution, what the PAC has noted is eminently valid and legally acceptable. The interest outgo on income tax refund is undoubtedly an expenditure like many other interest expenditures of the Government of India which constitutes about 5-7% of the total expenditure, and it cannot be a charge on the Consolidated Fund of India unless it is vetted by the Parliament through the Appropriation Law. Whether such interest is loaded with refund which is a deduction from the gross receipt or otherwise, the spirit of the Constitution is to make the parliamentary control over the government purses supreme and unchallenging. In this background, no amount of pleas that since the refund is a non-discretionary and statutory outgo, loaded with interest, and there is no need for parliamentary nod, is blasphemous and utterly butterly defiant view.

But the larger question which ranks above the accounting and vetting protocols is that ultimately, why is the CBDT so defiant? What harm will it do to its interest if it takes parliamentary approval for such an outgo? And the answer to all these queries may probably lie in the unscientific and politically-tinged practice of Revenue Target Fixation in the North Block. Unlike the global practice or an ordinary household where an expenditure is mulled over only after taking a closer look at the income earned, the Ministry of Finance specialises in designing populist schemes or many trappings of profligacy before deliberating over the potential of growth in revenue collections. Thus begins a journey towards inevitable fiscal deficit. To avoid such a deficit, a commonly known tradition is to stop all refunds, drawback payments and availment of CENVAT Credit towards the last quarter of the fiscal. This artificial mop-up of revenue apparently reduces the gap in tax collections and thus helps the Finance Minister in 'containing' the yawning gaps. During this period, since the Finance Minister must not face the possibility of any embarrassment in the Parliament, the senior revenue officers in the field formations are advised to focus on certain large taxpayers who may be 'requested' to pay 'EXTRA' advance tax or tax through PLA which may be claimed in the next fiscal. What helps them with certainty in this game is the pressure built on Central Public Sector Enterprises apart from large corporates. This way all efforts to garner more to ensure 'less' deficit finally may earn kudos and a few clapping for the Finance Minister in the House but at what cost? The cost is nothing but the growing interest bill on tax refund.

In the past few years, the mountains of tax refund in income tax have been growing to dizzying heights. So is the case with the interest on refund. For various reasons, including a significant bout of inefficiency and the prevailing culture of unaccountability in the system, a huge amount of refunds ranging between Rs 68000 Cr to 95000 Crore is being paid. When the refund itself is so huge, the interest component cannot be less than Rs 7000 Crore. It is indeed an output of our vicious administrative and political culture. An exception was made in the FY 2001-02 when the CBDT had shown estimated interest separately as expenditure. But it was soon discontinued when the Revised Estimate (RE) for the same year (as presented in the Budget for F.Y 2002-2003), the interest was reduced to NIL. Why was it guillotined can be guessed from the above stated reasons that when the Political master is too keen to garner taxes more than what is due as per the law, any estimation of interest outgo on refund will dwarf before the actual outgo and that may trigger criticism in the Sansad.

Now, yet another question that may arise here is that when the 'excess' tax paid is not a receipt for the Government why should it merge with other funds losing their identities in the Consolidated Fund of India (CFI). In other words, when something is not destined to be 'consolidated' in a constitutionally designed fund, why can't it be created as an Independent Fund only to take care of tax refunds. In other words, let's say the Parliament approves the creation of a New Fund called "Refund Fund of India" and also sanctions a corpus of Rs one lakh crore for a particular Financial Year. Whatever gets collected by the Revenue Boards may go and merge into the CFI and whatever is to be refunded to the taxpayers may be debited from the 'Refund Fund of India'. After one year the Ministry of Finance should present a detailed report to the Parliament giving details of refund under various heads and what is left in the FUND and how much is projected to be required in the next fiscal. This way the Parliament can monitor and get better informed about the growing silos of refund under the various heads. If the size of refund has to be reduced, the efficiency of the tax administration has to go up several notches. So, in simple words, such a system may ensure better accountability, transparency and enhanced efficiency for the tax arms of the Government. Given the trend in the CBEC for service tax refund, yet another potential case is germinating for the PAC in the coming years as the interest on Service tax refund is also a charge on the CFI and the same is not sanctioned by the Appropriation Law. So, keeping in mind the administrative complexities, the idea of creating a 'Refund Fund' may turn out to be more acceptable under the present circumstances. Let's hope the Executive does not short-circuit the legislative control over the purses of the Government as it would hurt many more provisions and the spirit of our sacred Constitution.