Govt faces cash crunch on tax refunds


Staff member
New Delhi April 30:

The government is facing a temporary cash crunch on account of tax refunds of nearly Rs 45,000 crore during April and May, prompting it to resort to short-term borrowing.

While tax refund is an annual affair, the use of electronic return filing and processing has resulted in faster refund of excess income. Corporation tax payment has resulted in the process getting expedited and a lot of bunched payments taking place in the first two months. In April alone, the tax refunds are estimated at Rs 30,000 crore to Rs 32,000 crore and another Rs 10,000 crore to Rs 15,000 crore would be added next month.

During the days of paper returns, a taxpayer's details had to be punched manually. This was then tallied and refunds, if any, were processed. Now, with electronic filing the entire information is available and instructions to banks for electronic refunds are also faster. The finance ministry, officials said, did not anticipate this kind of a problem when the annual borrowings were planned. Typically the government issues bonds which mature in, say, five, 10 or 15 years to raise resources and fund spending. In addition, it gets funds by way of taxes but this typically starts flowing in from June.

It also uses short-term instruments such as treasury bills that have tenure of up to 362 days to meet its cash requirement. In case of an emergency, there is a new instrument – cash management bills – that mature in less than 91 days. Officials said that the overall government borrowing will stay at over Rs 4 lakh crore despite the fact that the Centre has used cash management bills to raise Rs 26,000 crore from the market. And if the fund crunch remains more such fund raising will take place.

The government's borrowings from RBI also shot up 54% to Rs 48,400 crore on April 22. "We are keeping a watch on the situation. We will take a call if there is a need beyond May for any short-term borrowing. This is a temporary cash flow issue and we will stick to our fiscal deficit target set in the budget," a senior government official said when asked whether the government will issue more cash management bills beyond May.

Now, officials say that from next year the government is expected to tweak the borrowing programme to tide over such unexpected situations. "We will have to see how we devise the borrowing because the Direct Tax Code is expected to be in place and we will have to see the extent of refunds if at all they arise. If there is a need we will frontload the borrowing programme," another official said.