A major industry body has spotlighted significant disparities in India’s income tax system, advocating for reforms to ensure fairness and reduce litigation. In its Pre-Budget Memorandum for the Union Budget 2026-27, the Federation of Indian Petroleum Industry (FIPI) has presented key recommendations to the Finance Minister aimed at creating parity and transparency in tax administration.
The Core Issue: A Lack of Parity
Experts highlight a fundamental inequity in how the Income Tax Act treats interest. Currently, the system penalizes taxpayers more heavily for short payments than it compensates them for delayed refunds.
- Interest on Refunds: Under Section 244A, when the department owes a refund to an assessee, it pays interest at a rate of 0.5% per month.
- Interest on Demand: Under Sections 234A, 234B, and 234C, when an assessee owes tax to the department, they are charged interest at 1% per month.
Furthermore, the interest received on refunds is taxable in the hands of the assessee, while the interest paid to the government on tax dues is not deductible. FIPI argues that on the grounds of equity, the interest rate on both refunds and demands should be standardized.
Seeking Clarity on the Refund Amount
Another area ripe for reform, according to FIPI, is the ambiguity surrounding what constitutes the “refund amount” on which interest is calculated. Section 244A(1) refers to a refund of “any amount,” which could be interpreted to include the total refund—comprising tax, interest, penalty, etc.
The absence of clear language leads to inconsistent interpretation and avoidable litigation. The industry body has suggested inserting a clarificatory provision in Section 244A to specify whether interest is payable only on the principal tax component or on the entire refund sum.
Curbing Erroneous Set-Offs and Demanding Accountability
A persistent pain point for taxpayers is the automatic adjustment of legitimate refunds against old, erroneous, or disputed demands. Even when an assessee objects on the CPC portal, there is often no immediate remedy, despite settled legal principles that prevent such adjustments when the demand is based on a issue already decided in the assessee’s favour.
FIPI’s key suggestions to curb this include:
- Mandatory Intimation: No set-off should occur without written intimation to the taxpayer and a formal process to address their objections.
- Systemic Accountability: Clear guidelines and accountability should be established between TRACES/CPC and jurisdictional officers to prevent unauthorized adjustments.
- Compensatory Interest: In cases where refunds are incorrectly held up due to erroneous demand adjustment or non-grant of TDS credit, a higher interest rate of 12% per annum should be payable to the assessee.
A Push for Equitable Reform
These recommendations underscore a growing call for a tax system that is not only efficient but also fundamentally fair. By aligning interest rates, clarifying provisions, and implementing robust safeguards against erroneous adjustments, the government can reduce litigation, build taxpayer trust, and promote a more equitable administration of tax laws. All eyes will now be on the upcoming Union Budget to see if these proposals for parity and clarity find acceptance.
