Interest on Refunds of Income Tax/Customs/Excise/Service Tax - unauthorised and unconstitutional?
ARTICLE 114 of the Constitution of India states that a bill will be introduced 'to provide for the appropriation out of the Consolidated Fund of India of all moneys required to meet the grants so made by the House of People and the expenditure charged on the Consolidated Fund of India but not exceeding in any case the amount shown in the statement previously laid before Parliament'. The Bill so introduced will be based on the individual demand for grants. The Appropriation Act passed by Parliament provides for payment from the Consolidated Fund of India.
Article 114(3) of the Constitution stipulates that no money shall be withdrawn from the Consolidated Fund of India except under appropriation made by law.
Payment of interest on refunds of excess tax is a charge on the Consolidated Fund of India and is, therefore, payable only after having been authorised under the due appropriation made by law. Rule 8 of the Delegation of Financial Powers Rules, 1978, describes 'Interest' as primary unit of appropriation for classification of interest expenditure.
The Department of Revenue/Central Board of Direct Taxes (CBDT) has been classifying interest on refunds of excess tax as reduction in revenue.
This incorrect practice has been commented upon successively in CAG's Audit Report on Union Accounts as well as in CAG's Report on Direct Taxes, but no corrective action has been taken by the department.
This issue was examined by the Public Accounts Committee and the Committee in their Sixty-Sixth Report (2012-13) had observed that there was no valid ground as to why the Department could not make broad estimates of expenditure on interest liability on tax refunds based on the studied trends of the past. The Department itself had admitted that in terms of Article 266 of the Constitution, it had no legal authority to withdraw the 'interest' on excess tax collected/refunds without recourse of Appropriation law passed by Parliament. Further, the Committee reminded the Department that Article 114(3) of the Constitution clearly mandates that no money shall be withdrawn from the Consolidated Fund of India except under 'Appropriation' made by the Legislature.
CAG also found that a similar practice was also followed by the Central Board of Excise and Customs (CBEC) in respect of payment of interest on refunds of Customs, Excise and Service Tax.
CAG has been raising this issue since the last three years and nobody seems to be really bothered. If money can be withdrawn from the Consolidated Fund of India by an Assistant Commissioner, without an authorisation by Parliament, there is something terribly wrong with the accounting system and if we don't rectify it at the earliest, the whole system will collapse.
In the meantime, if this issue is not settled soon, the Revenue Departments may soon stop paying interest on delayed refunds.