The finance ministry is facing an internal conflict over income tax refunds. The Income-Tax Department has turned down a proposal by the Department of Economic Affairs (DEA) to go slow on refunds to taxpayers.

DEA has asked the Central Board of Direct Taxes (CBDT) to go slow on tax refunds in the coming months so that the government does not face any resource crunch.

CBDT has rejected Revenue Secretary Sunil Mitras contention by saying that taxpayer money cant be withheld.

This has alarmed DEA, which is expected to be hard-pressed for funds given the possibility of slower economic growth and an increase in the subsidy bill.

The finance minister is believed to have asked the two to resolve the issue between themselves.

A senior CBDT official said once a refund was determined, especially in e-filing, no one could withhold it. Can the government say that refunds will be delayed because it is under financial stress? Will the government allow an assessee to withhold tax because he is facing a financial problem? asked the official.

DEAs argument that a higher refund outgo will put pressure on the government to borrow more is rejected by experts and expenditure department officials. They say its a short-term trend and will not impact government finances over the year.

The government has said it will borrow Rs 2,50,000 crore between April and September, 60 per cent of the budgeted market borrowing of Rs 4,17,000 crore for 2011-12. So far, it has borrowed Rs 72,000 crore. While the finance ministry pays 6 per cent a year on late refunds, it has been borrowing from the market at 7.03-8.30 per cent.

The tax department refunded over Rs 23,000 crore in April. The figure is expected to cross Rs 1 lakh crore for the year. The department had refunded Rs 57,000 crore in 2009-10 and Rs 74,000 crore in 2010-11.

CBDT official say with a significant amount paid in the first month of the financial year, the burden for the coming months will be substantially lower. They say timely payments help save on interest.

The governments net direct tax collection in April fell 70 per cent to Rs 4,000 crore, compared with Rs 14,000 crore in the same month last year. This was mainly on account of refunds totaling Rs 25,000 crore.

Gross direct tax collections were Rs 29,000 crore, 15 per cent more than in April last year.