India Facing Cash Crunch on High Tax Refunds01 May 2011 Share on:
Don't panic. It is temporary cash crunch that the government of India is facing on account of tax refunds of nearly Rs 45,000 crore during April and May. But this cash crunch is prompting it to resort to short-term borrowing.
People might be thinking that this is an annual affair but why is it happening now? 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. The whole process used to take time and the tax refund was spread across several months giving the government time to access its credit situation and work accordingly.
Now, with electronic filing the entire information is available at a click of a button. IT revolutionized I-T. The refund which used to be sent through cheques or transferred to the accounts now takes lesser time as instructing banks for electronic refunds is much faster way then it was before.
The finance ministry 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. Cash management bills were introduced in August 2009 as a short-term borrowing instrument to help the government meet its temporary cash flow mismatch. It is non-standard in tenor and is of less than 91 days duration.
The government has sold cash management bills worth 260 billion rupees, including Friday's sale, in the financial year that began on April 1.
The government has the option of using the cash management bills to repay its short-term loans from the central bank. The government has been borrowing heavily from the Reserve Bank of India under the ways and means advances facility, a short-term loan program that allows the government to repay its overdraft with the RBI within 10 days.
The government's borrowing in the week ended April 15 stood at 506.07 billion rupees, far higher than the 300 billion rupees limit it had set for April 1 to April 20. Under the ways and means advances facility, if the government's borrowing exceeds 75% of the limit it has to repay the RBI through the auction of bonds.
The official said that the government is committed to adhering to its fiscal deficit aim of 4.6% of gross domestic product for this financial year.
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.