To discourage corporates from making advance tax payments in excess of their liability, the finance ministry is likely to pare the interest rate on refunds in Budget 2003. At present, the government pays 8 per cent interest on late refunds.

According to finance ministry sources, the refunds in the current fiscal are expected to touch Rs 25,000 crore (Rs billion). In 2001-02, the refunds were to the tune of Rs 22,000 crore (Rs billion).

In review meetings held with the revenue department, Minister of State for Finance Gingee Ramachandran had noted that the 8 per cent interest paid on refunds was significantly higher than the interest rate offered by banks on deposits for similar periods.

He directed the Central Board of Direct Taxes to bring the interest rate on refunds at par with the bank deposit rates.

While the bank rate is 6.5 per cent, most of banks offer an interest rate of 5-6 per cent on one-year deposits.

The department regularly asks corporates to park substantial sums as advance tax to show a higher revenue realisation. The rate of interest for such refunds was as high as 18 per cent a few years ago.

Run-up to the Budget 2003