By Taxindiaonline News Service
NEW DELHI, 30 JULY : IT was bound to happen sooner or later. The CBDT has finally caved in! It is learnt to have agreed to a further cut in the interest rate on refund. Although a major cut was introduced in the Budget this year but even then it was higher than the prevailing market interest rate. And this was a cause of worry for many in the MoF who wanted a permanent solution by linking it to a floating rate system as it was putting extraordinary strain on the exchequer.

So, a proposal was mooted to link it to the average yield on 364-day treasurey bills which hovers around six per cent in the recent years. The benefit of this new system is that the Exchequer would be able to save huge sums outgoing as interest on corporate refunds. What used to make it a back-breaking burden on the direct taxes mop-up was the prevailing vicious circle : Board used to put huge pressure on field officials for realising targets and CITs concerned used to coax and persuade heavy corporate taxpayers to park their funds with the government and take the benefits of higher interest rate.

Another reason for the general tendency among the companies to contribute more than their expected corporate tax liability was the punishing penal interest rate on shortfalls. Given that a company has to pay about 90 per cent of their projected tax liability in four instalments and in the event of any shortfall of more than 10 per cent, a penal interest rate of 15 per cent was applicable, parking funds with the CBDT was indeed a profitable venture. Such a decision also used to make the concerned CIT happy as it helped him report to the Board that he managed to exceed his revenue targets!

But such a practice was proving detrimental to the Government not only in terms of extra outgo but also severe accounting problems. Given that extra revenue with the exchequer was not the Centre's own revenue, it used to give a false satisfaction to the FMs that they have managed to reach closer to their revenue projections. But after the refunds were given, it used to widen the deficit more than what was budgeted!

So, credit now goes to Mr Jaswant Singh who gutsily decided to do away with this practice and go for a realistic collection figure rather than feel happy with an artificially inflated mop-up which was not due to the exchequer. For the CBDT it was very natural to resist the move as it was taking away one of its soft options to meet the revenue targets which are often fixed at artificially high levels!

But now the future Boards will have to develop the habit of painting an honest picture before either Mr Singh or others, and there would be no room for any sort of manipulations. A realistic target fixation is indeed the need of the hour and would help India in working out the actual GDP/tax ratio which has grown marginally in the recent years but continues to be significantly lower than even its South Asian and Asean counterparts.

However, before the new interest rate is notified, an amendment in the Finance Act has to be done and it is likely to be done in the present Monsoon Session.