Sauce For The Goose Isn’t Sauce For The Gander

Obviously we all agree that money now is better than the same money later.Hence,the practice of using discount rates.The government has an interesting take on discount rates.

There are various provisions in the Income Tax Act for charging of interest if a taxpayer fails to pay tax on time. Similarly, there are provisions for giving interest on a refund to taxpayers.

When a taxpayer defaults in making payment of tax, interest or penalty, he has to pay interest @ 12% p.a., (in some cases even @18% p.a.), In contrast, I-T the department pays interest only at 6% p.a. on refunds issued. The rate remains 6% even if the department delays the refund. Moreover, if there is default in paying tax, in addition to interest, the tax payer is further liable for penalty u/s 221 @ 12%. However, there is no corresponding liability on the department if it defaults in issuing refund in time to the taxpayer.

The real impact of such provisions is more draconian. The interest paid by the taxpayer is not allowable as expenditure while computing his or her taxable income whereas the interest received by the taxpayer is taxable.

Thus, if the department charges interest @ 12% p.a., the interest becomes disallowable while computing his taxable income. In other words, the taxpayer can save Rs12, if he earns Rs17 and pays tax thereon of Rs5. Thus, the net impact on the taxpayer of such interest is 17%.Against this, interest given by the department is taxable in the hands of the taxpayer and, therefore, 6% interest given by the department becomes only 4% (post tax) in the hands of the taxpayer because he has to pay tax of around Rs2 on an interest of Rs6 on the refund.Thus, the burden of interest on the taxpayer is 17% while the benefit by way of interest on the refund is only about 4%.

The problem gets  worse because taxmen are not held responsible for delays in issue of refund. Though instructions exist for timely issue of refund, they are seldom complied with. At times, higher authorities give oral instructions to withhold large refunds to achieve budget targets. Thus, they get rewarded by doing an injustice to the taxpayer.

All told, the idea seems to be that might is right and the government has a better claim to cash it has managed to hold onto anywhichway unlike  individual taxpayers.