Finance Minister Jaswant Singh has been forced to step in to resolve a tussle between the department of economic affairs and the Central Board of Direct Taxes over a reduction in the interest rate on direct tax refunds.

The CBDT offers an interest rate of 8 per cent on refunds. The department of economic affairs has been pushing for linking the interest rate to the average yield on 364-day Treasury Bills, which stands at around 6 per cent for 2002-03.

A change in the rate will require an amendment to the Finance Act. The CBDT is, however, against a cut in the rate.

As both the CBDT and the department of economic affairs had stuck to their views, it was left to Singh to take a final decision, finance ministry sources said.

In the first three months of this fiscal, refunds on direct tax collections topped Rs 12,000 crore (Rs 120 billion), and corporate tax refunds accounted for over three-fourths of it.

Given the 8 per cent interest rate offered on delayed refunds, corporates find it very attractive to park their idle funds with the exchequer by making higher advance tax payments.

The CBDT also encourages companies to pay more in the last quarter of every fiscal to show better revenue collections.

Moreover, corporates are required to pay at least 90 per cent of their tax liability in four instalments to the government.

As corporates have to pay a penalty of 15 per cent if the shortfall in their liability exceeds 10 per cent of the tax assessed by the department, they generally pay in excess.

Incidentally, the Central Board of Excise and Customs, in its meeting last week, recommended a cut in the interest rate on refunds from 8 per cent to 6 per cent. However, a cut in the rate by the CBEC does not require an amendment to the Finance Act.

CBDT sources said since the rate was cut as recently as in 2001, the board would consider a further reduction in the interest rate only in the next year's Budget.

Recently, the Comptroller and Auditor-General also drew the finance minister's attention to the huge outgo on account of refunds and the rising interest rate burden on the government because of delayed refunds.

In a formal communication to Singh, the CAG said last year's audit revealed high interest payments on refunds in some cases.

In 2002-03, total refunds touched Rs 22,676 crore (Rs 226.76 billion), compared to Rs 17,304 crore (Rs 173.04 billion) in the previous year.

The income-tax department had issued 3.98 million refund vouchers last fiscal, compared to 2.67 million vouchers in 2001-02. Last year too, almost 75 per cent of the refunds were to corporates.