THE POLICY LAB (TPL) - 58
JANUARY 13, 2025

By J B Mohapatra

A: Typically, a discussion on the efficiency of a direct tax administration in discharging its refund obligations centres on either or both of the following 2 considerations: one, how close to or within the time lines of a country's tax charter or standard of service that the returns have been processed and refunds issued, and two, how successful is the tax administration in configuring the refund risk components in its tax refund system to thwart fraudulent claims. In context of the increasing refund claims load in volume and as a proportion of the gross tax collection as shown in Table 1 below, that the magnitude of Income Tax Department's (ITD) responsibilities in attempting to reach the twin objects becomes clearer:

Table1:

B: While gross collection in India's context comprise (a) Self-Assessment Taxes (SA tax) (b)Advance Tax (c) taxes paid pursuant to demand notices on completion of assessment (or Regular Taxes) and (d) TDS, an analysis of what each of these components are likely to have contributed to the refund claims relative to other components and which of the component/s should be the prime precipitator of refunds would be essential, as a granular level information on these aspects is not available.

C: First, refund claims made even when SA tax has been paid should be a rarity mostly occasioned by unforeseen circumstances, sometimes by gross miscalculation or even by fraud and remain a negligible proportion of the gross refund load.

D: Second, refund out of advance taxes paid is required to be seen in the context of how statutorily the advance tax provisions have been arranged to make the taxpayer aware at each quarter of a financial year that the department does not expect by way of advance tax any more than he is statutorily liable to pay. One, the schedule of payment of advance tax by quarterly instalments in section 211 (15% by June, 45% by September, 75% by December, and 100% by 15th March) perforce goading the taxpayer to take stock of his advance tax liability no less than 4 times in a single year. Two, the statutory sanction for a taxpayer to vary his advance tax payment for each quarter in accordance with his own estimate of his current income as per section 210(2):

"(2) A person who pays any instalment or instalments of advance tax under sub-section (1), may increase or reduce the amount of advance tax payable in the remaining instalment or instalments to accord with his estimate of his current income and the advance tax payable thereon, and make payment of the said amount in the remaining instalment or instalments accordingly".

Three, allowing offset of TDS and TCS for determining advance tax dues as provided under section 209(1)(d).

Despite all the leverage for the taxpayer built around the advance tax provisions, one admits however that there remains the possibility of a refund claim out of the advance tax paid, howsoever small, compared to undermentioned 2 components.

E: Third, refund out of regular tax, specifically when large assessments get reversed in appeal or favourably resolved for the taxpayers, would be considerable.

F: Fourth, the TDS regime, the compliance-by-design approach intending to lessen tax payment formalities for taxpayers while supporting the tax administration in preventing misreporting and underpayment.

If these two- regular tax and TDS - admittedly the front runners in catalysing refunds, are considered in relation to gross refund, then the proportion thereof appears as follows in Table 2:

By all counts India is a high refund generating tax jurisdiction going by the statistics of developed economies such as USA or UK, jurisdictions which additionally administer refundable tax credit regimes (EITC or ACTC in USA or cost of living credits in UK) through their tax refund system, unlike any such refundable tax credits in India's tax repayment regime.

G: The issue therefore worth examining is whether the volume of tax refunds and attendant administrative and technology activities have a tendency to create conditions for sub-optimal utilisation of the core capabilities of the department traditionally geared at revenue mobilisation and preventing leakages, and whether that can be countered through proper legislative efforts at reducing the tax refunds. Below some areas for examining the substantive law on few items of income impacting refund flow and for structural improvements to refund management cycle:

H: To begin with, a review of the TDS regime itself which has grown from covering 4 specific categories of income in 1961 to 40 items under TDS and 13 items for TCS in 2024. While it is well understood that TDS under section 192 (specifically salary to non-government employees), under section 194A (payment of interest other than interest on securities), under section 194C (payment for contracts), under section 194 I (payment of rent), under section 194J (fees for professional and technical services), and under section 195 (payment of other sums to non-residents) bring in the largest volume out of gross TDS collection, a fruitful exercise from the context of refund would be to examine whether or not TDS rates under the provisions such as 194C or 194J have triggered disproportionately larger outgo of refund and thereafter consider an appropriate rate of TDS to stem the outflow by way of repayment.

Second, efficacy of provisions such as 194N prescribing TDS on cash withdrawal from banks also needs a relook considering that existing provisions such as 40A, 43(1), 43CA, 44AD, 80JJAA. 269SS, 269ST and 269T have already made cash expenditure disallowable for determining income or refusing allowance on cash investment or in some circumstances made cash transactions suffer penalties. SFT mechanism provided in Rule 114E also captures the cash withdrawal and is an item for reporting by reporting entities.

Third, relook at provision such as under section 194Q laying down TDS at 0.1% on buyers responsible for paying any sum to the resident for purchase of goods of value exceeding Rs 50 lakhs and responsibility of sellers on corresponding sale of goods value in excess of Rs 50 lakhs for collection of TCS at 0.1% of sales under section 206C (1H). If tracking a high value financial transaction per se were said to be the foundation in the construct and intent of 194Q and 206C(1G), then as argued many times in the past, relevant data of purchase and sale are available in GSTN data set and hence are always within the reach of ITD as well.

I: Structurally, TDS regime in India exists alongside self- reporting and paying through SA tax and advance tax. While statute has striven to encourage taxpayers for making the right amount of advance tax payment, 2 possible areas that could be explored for easing the refund load and lessen compliance burden are (a) relaxing the rigour of advance tax obligations for a specified class of cases whose 90-95% of gross income are derived post-TDS and affording them a dispensation to discharge the remainder of the tax liabilities through self -assessment tax route and (b) increasing the threshold liability for advance tax payment laid down in section 208 (any one is liable for advance tax if tax payable for the year is in excess of Rs 10,000), a threshold which has remained unchanged since last 15 years

A small structural adjustment in the statute for reducing the number of direct refund to taxpayer's account may as well be through affording an option to the taxpayer to allow him to apply the resulting refund against the subsequent year's tax obligations whether as advance tax or SA tax, breaking the cycle of payment of tax- refund- payment of tax on a yearly basis.

J: As stated at page 59 of OECD Tax Administration Series, 2023 : Comparative Information on OECD and Other Advanced and Emerging Economies : "Tax regimes with a high incidence of tax refunds are particularly attractive to fraudsters", it will be adding to ITD's tax efficiency if tax payers are empowered to get to their correct tax computation and pay the right amount of taxes without creating opportunities for taxpayers to fall for temptations on a later date.