Interest rate discrimination by Income Tax department

Basics – The taxpayer has to discharge income tax liability on the estimated income earned/to be earned during the current year (for example, the year starting 1^st April 2014 and ending on 31^st March 2015, taxes to be paid during the year as Advance tax). Many income such as salaries, professional fee, contract receipts, etc are subject to withholding tax (Tax deducted at source – TDS)

If taxpayer is not paying the taxes on time

As per Income Tax Law, in case, Advance tax is not paid or TDS is not done, the taxpayer has to pay interest. For example –

• Section 234B – interest on short payment of advance tax  is 1% per month

• Section 234C – interest on deferment or non-payment of advance tax is 1% per month

• Section 234A – interest on taxes due in case of non –filing or delayed filing of income tax return is 1% per month.

If government has to refund excess tax collected

In contrast, if the taxpayer has paid an excess advance tax or TDS, there is no definite timeframe by which the refunds are made by the Government. The taxpayer has to wait for an indefinite period. So, common sense says that government has to pay interest on such refunds, isn’t it? Yes. They do pay interest on refunds!

But they pay interest to the taxpayers at the rate of 0.5% per month (Section 244A). (Discrimination – compare against the interest which taxpayer has to pay) –

Secondly, the period for which the government pays the interest is questionable. It’s crazy. Let me explain this with an example. Assume, on the interest of FD, the banker has deducted tax (TDS) of Rs.50000 during June 2014. The taxpayer will file his return during July 2015 seeking refund of Rs.50000. The Income tax department will process his return during July 2016 and issues a refund cheque along with the interest at the rate of 0.5% per month. But the catch here is the interest is paid for 15 months, instead of 25 months (not from June 2014 but from April 2015!!!)  

The Income tax law says the interest is payable at 0.5% for every month from the first day of the assessment year to the date of grant of refund.

Come on government, be fair to the taxpayers. If you are holding their money, pay interest at the same rate you are collecting from non-payers and pay from the date of receipt of such money in your account. Don’t you think that is an incentive for prompt taxpayers (excess taxpayers!)?

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