Huge refunds to corporates took the sheen off direct tax collection in April and May. The total refunds jumped almost 95 per cent to touch Rs 9,792 crore (Rs 97.92 billion) in April-May 2003 from Rs 5,034 crore (Rs 50.34 billion) in April-May 2002.

According to revenue department officials, the gross direct tax collection in April-May 2003 stood at Rs 9,886 crore (Rs 98.86 billion), up Rs 1,760 crore (Rs 17.6 billion) or 22 per cent from Rs 8,126 crore (Rs 81.26 billion) during the corresponding period last fiscal.

The gross corporate tax collection during the first two months of this fiscal stood at Rs 3,982 crore (Rs 39.82 billion).

The refunds, however, shot up a whopping 509 per cent to Rs 7,636 crore (Rs 76.36 billion) in April-May 2003 from Rs 1,252 crore (Rs 12.52 billion) in the corresponding period last year. This has resulted in a net outflow of Rs 3,654 crore (Rs 36.54 billion) on the corporate tax front.

Officials in the Central Board of Direct Taxes said the gross income tax collection was comparatively higher at Rs 5,904 crore (Rs 59.04 billion).

Income tax refunds were also lower at Rs 2,156 crore (Rs 21.56 billion) in April-May 2003, compared with Rs 4,352 crore (Rs 43.52 billion) during April-May 2002.

Finance ministry officials said a high interest rate of 8 per cent offered on tax refunds was the primary reason for high corporate tax refunds.

For corporates, paying high advance taxes and parking excess funds with the government makes immense sense, given the prevalent soft interest rate regime.

Earlier, the department of economic affairs had proposed that the interest on refunds be indexed to the average cost of government borrowings during the year.

While the Centre today borrows at less than 6 per cent from the market, the interest rate offered on refunds continues to be higher by over 200 basis points.

The revenue department officials said the interest rate on refunds had been cut to 8 per cent from 12 per cent around two years ago.

"The rate-cut proposal was discussed. But since the rate was cut only in 2001, it was decided to consider the proposal in the next Budget," said an official.