Give us prior information on payment of refunds, says DEA to I-T

Prompt and unprecedented return of tax payer money in April-May created cash flow problems; tax dept may give Rs 75,000 cr during rest of the year

The department of economic affairs (DEA) has asked the revenue department to give it prior information on payment of refunds to tax payers, to enable better cash management for the government.

DEA says it would have borrowed far more from the market in the first half of this financial year if it had known of the huge volume of refunds the revenue department was giving to taxpayers.

The government had to resort to short-term borrowings in April, as the income tax department issued two million refunds of Rs 25,000 crore during the month, much higher than ever before. This was about a third of the total refunds of Rs 74,000 crore issued last year.

The tax department may give another Rs 70,000-75,000 crore during the rest of the year, taking the total to about Rs 1,00,000 crore this year.

Impact

“All we said is that you should keep us informed. Our cash flow went for a six because usually in April there is not so much cash outgo. Had we known about it, we could have frontloaded our G-sec borrowings in April or we would have started the exercise in March, after the Budget,” said a finance ministry official.

The government had to raise Rs 32,000 crore through cash management bills (CMBs) in April. CMBs are issued to handle government’s temporary cash flow mismatch and have a maturity of less than 91 days. The quantity of treasury bills, which have a maturity of up to 362 days, also increased in April.

“We were in the market almost on a daily basis for five to six days,” said the official, adding the government had managed to meet its cash requirements through short-term borrowing and at the moment there was no need to revise its borrowing limits for the year.

Amounts
The government had said it would borrow Rs 2,50,000 crore during April-September, 60 per cent of the total budgeted market borrowing of Rs 4,17,000 crore for financial year 2011-12.

Though the government will still be borrowing more in the first half, the frontloading is much less than what was mobilised during the global financial crisis. Those years, the government deliberately chose to have a higher amount in the first half, so that in the second half it would mop up less from the market, so as not to crowd out the private sector when it needed funds the most.

The income-tax department, on the other hand, says it cannot sit on taxpayers’ money and by issuing a major part of the pending refunds, it had taken the pressure off the government in the coming months.

Net direct collections of the government fell by 47.9 per cent to Rs 12,954 crore in April-May, as the refunds issued in the first two months this year more than doubled compared to the same period last year.

Gross direct tax collections minus refunds, on the other hand, had increased by 37.3 per cent to Rs 50,405 crore, against Rs 36,702 crore in the year-ago period.

The decline in net collection was on account of an increase of 216.7 per cent in tax refunds, which stood at Rs 37,451 crore, against Rs 11,824 crore last year. A little over four million I-T refunds have been issued in the current financial year till now.