Nothing is simple in income-tax law, not even calculation of interest payable to or due from tax department in case of tax demands/ refunds. This despite the fact that the computation of interest is not on compound interest basis. The complexity arises owing to interest computation under different provisions for different periods of delay and on different basis.
Interest payable by a tax payer
To understand the complexity, let us have a look to the scheme for payment of tax under the Act and the interest on its delay. Every taxpayer has to pay advance tax on ‘pay as you earn’ basis in four installments on prescribed due dates (three installments in case of non corporate assessees). For this purpose, tax payer has to estimate income/tax liability for a financial year in advance i.e. before close of the year after considering any tax deducted at source.
Interest can be payable for various defaults under different provisions some of which run parallel (on the same period). Currently interest is payable at the rate of 1 percent (per month) on any kind of default.
Interest is charged under section 234A for late filing of tax return, under section 234B for short-fall in payment of advance tax and under section 234C for deferment of installments of advance tax. Interest is chargeable under these sections at the rate of one percent with effect from September 2003 onwards. So far so good. But there is much more to it. See table:
Interest payable by the Revenue
As far as granting of interest to the tax payer is concerned, it is granted at half percent under section 244A. If the refund is on account of excess advance tax/TDS it is granted from 1 April of the next year and if it is out of tax which was paid on demand by the tax authorities, it is from the date when it was paid.
Need for rationalization
As regards levy of interest on the tax payer, there is no case for charging of interest on account of delay in filing of the return, (section 234A), since this is not compensatory in nature, which is the case when there is a delay in payment of tax. Rather, this section is penal in nature. In fact, prior to 1989, there was no such interest levy, but there was a penalty for delay in filing the return. These penalty provision were deleted and interest provision were introduced. However, with passage of time, the penalty provisions have again been introduced for not filing the return of income before 31 March, of the relevant assessment year and the penalty is Rs5000.
It is not equitable to charge both an interest as well as a penalty for late filing or non filing of tax returns. Ideally, it is the provisions of section 234A which must be done away with.
As many as four different provisions cover interest for delay in payment of tax, viz: sections 234B, 234C, 234D and 220. is suggested that that these provisions may be merged. Even the provision for grant of interest under section 244A on refunds may also be merged with these four provisions and a consolidated provision may be introduced in the law, to charge/grant the interest like in case of a running account.
The modus operandi of such “running account” will be such that when ever for any particular period, there is shortfall of tax, the taxpayer will pay the interest and wherever during any period there was excess payment of tax, the government will pay the interest. Such a provision will simplify the procedure to charge or pay the interest for the period of deficiency or excess. Further an important aspect which generally goes unnoticed is that whereas the interest is chargeable in delay for payment of installments of advance tax from the date on which the installment was due, but if there is any refund out of advance tax, the interest is granted not from the date on which the payment was made but only from the 1 April, of next year. The suggestion of consolidated provision will remove this anomaly. Further since the interest is charged separately from the deductor in case there is delay in payment of TDS to the exchequer, the interest to be charged from the person from whose income it was to be deducted should be on basis of advance tax to be computed after reducing the TDS deductible and not TDS actually deducted.
The discriminatory treatment between interest charged to taxpayers and interest granted on refund to a taxpayer is that the tax payer has to pay interest at one percent per month whereas the tax payer is granted refund at half percent per month only. There is apparently no convincing reason for such discrimination except that it may be argued that higher rate of charging the interest is to ensure timely payment of tax dues. If it so, why the same rate is not allowed to the taxpayer when he is forced to pay disputed tax which is ultimately refunded on account of a favorable decision from the appellate authorities. Ideally, the relationship between the taxpayer and the tax administration should be that of a debtor/ creditor in this regard and there should be the same rate of interest whether chargeable to or payable to a taxpayer.
To add to the woes of the tax payer the interest payable to a taxpayer is treated as the tax payer’s taxable income, but no deduction is available in respect of the interest payable by the tax payer from his income. To provide equity, the tax laws should permit as a deduction the interest payable by the tax payer. There is a good case to argue that such expenses, though not really for the purposes of earning the income, nonetheless are not in nature of personal expenses either. Further, a connected issue is regarding deduction for interest paid on the loan which a taxpayer may take for payment of tax because of a liquidity problem. The deduction for such interest from taxable income should also be allowed because such expenses also can not be said to be personal in nature. Such provisions will also stimulate the early payment of tax dues.
It is also important to notice that the rate for interest in tax laws are not timely aligned to the rate of interest prevalent in the market. Perhaps, the rate of interest for the period falling in a financial year may be prescribed in annual budget of that year.
Ganesh Raj is Tax Partner, Policy Advisory Group, Ernst & Young