Income Tax - Interest on Refunds - Contravention of Constitution - PAC
THE Public Accounts Committee of Parliament (2012-13) in their 66th Report had disapproved withdrawal of moneys by the Ministry of Finance (Department of Revenue) out of the Consolidated Fund of India (CFI) for interest payments on income tax refunds without Parliamentary approval. An expenditure on interest on refunds amounting to Rs. 10,499 crore was incurred by the CBDT in the year 2010-11 and a total expenditure of Rs. 37,365 crore over a period of five years between 2006-07 to 2010-11 without obtaining approval of Parliament through necessary appropriations. The practice was viewed as contravention of Article 114(3) of the Constitution of India by the C&AG. On a reference by the PAC Secretariat to the Ministry of Law and Justice, the Attorney General had opined that he was in complete agreement with the views of the C&AG. The Secretary, Revenue, Ministry of Finance had also assured the Committee that the Department would devise a procedure which is Constitutionally correct and administratively feasible. Thereafter, based on the observations of the Audit, depositions made by the representatives of the Ministry of Finance (Department of Revenue) and the opinion received from the AG, the Committee, in their Report [66th Report (15th Lok Sabha)] presented to Parliament on 26-02-13, had observed that they found no valid ground as to why the Department could not make broad estimates of the interest liability on tax refunds based on the studied trends of the past and seek excess grants where estimation fell short of Parliamentary authorisation. The Committee had, therefore, recommended that the Ministry of Finance follow the prescribed procedure in accordance with the Constitution and the Financial Rules to avoid such a deviation. Subsequently, on a reference made by the Ministry of Finance (Department of Revenue), the AG tendered a revised opinion which was just opposite to the opinion given by him to the Committee on an earlier occasion.
The Committee noted with deep concern that despite the Constitution prohibiting withdrawals from CFI except under Appropriation made by the legislature, the Department of Revenue has been making payment of interest on refunds without the approval of Parliament. The Committee reiterated their earlier recommendation that the Ministry devise a procedure in conformity with the Constitutional provisions and the Financial Rules so that interest payments on tax refunds are shown in the Annual Financial Statement (AFS) and Demand for Grants and receive Parliamentary approval as ordained by the Constitution.
The Committee noted that no tax can be imposed or collected, save by the authority of law as proclaimed by Article 265. In view of the same, any excess payment received by the State after the tax assessment is made, has to be refunded to the assessees. The amount received 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 Committee did not accept the specious argument of the Ministry that the interest payments on such refunds are reductions from gross receipts. Since interest on refund of taxes is paid out from and out of the CFI, the withdrawal of moneys from the CFI for payment of interest requires authorisation of Parliament under Article 114(3) read with Article 266(3) of the Constitution.
The Committee noted that interest payments are the second largest component of revenue expenditure. The interest payment include payment of interest on Public Debt both internal and external, and other interest bearing liabilities of the Government which include insurance and Pension Funds, Provident Funds, Reserve Funds, deposits, interest on special securities issued to various Central Public Enterprises and interest payment on borrowing under market obligation scheme. The Committee noted that all the aforesaid interest payments come under the purview of revenue expenditure and form part of the Annual Budget and are appropriated with the prior approval of Parliament. The Committee further found that every year approximately 5-7 per cent of the total expenditure is incurred on interest payments by the Government.
The Committee found that the Department of Revenue has no option but to seek ex ante or ex post facto Parliamentary approval for interest payments on tax refunds. The Constitution leaves no doubt about the manner of authorization of expenditure or withdrawal of moneys from and out of the CFI other than seeking ex ante approval under Article 114 and 115(1)(a) or seeking ex post facto approval of Parliament under Article 115(1)(b) of the Constitution.