There is an incentive for taxpayers who file their income-tax returns electronically - they will get their refunds within a month.

To speed up refunds and encourage electronic filing of tax returns, the Central Board of Direct Taxes has promised expeditious refunds.

The wait for refunds in the case of physical tax returns ranges between 5-10 months. "We want tax-payers to file electronically as that helps in faster processing of refunds," Sudhir Chandra, chairman, Central Board of Direct Taxes, told reporters.

As on December 31, 2010, there were about 40 lakh refund cases pending with the tax department. Last year, a Comptroller and Auditor General report had highlighted that it takes as much as 10 months for a taxpayer to get his refund.

Reports of widespread corruption and frauds in issue of refunds have also spurred a revamp of the refund system.

"The whole idea is that small taxpayers should not face any hardship in his interface with the department," Chandra added. Though the e-filing of tax returns is rising in absolute terms every year, its level has stagnated at about a quater of the total retuns filed.

The verification of the paper tax returns filed is a tedious process that also delays tax refunds. This has become a bigger issue with the rising refunds. In 2010-11, the government had refund extra tax of Rs 78,000 crore.

"E-filing ensures that tax payers' information on income, taxes and refunds are uploaded in the tax system instantly and tax computations are processed on a real-time basis," said Vikas Vasal, executive director, KPMG.

The income-tax department has been trying to make refund process faster and efficient through the use of technology interface.

"A refund banker scheme is already in place in the whole of country to ensure that taxpayers get refunds well in time," said an income-tax department official.

Income-tax authorities send data to State Bank of India which in turn issues refund it directly to tax-payers under the refund banker scheme.

"We issued the highest-ever refunds in 2010-11," says Chandra, who had instructed his officials to clear all pending refunds before March 31.

To ensure that his directions were followed, in letter and spirit, any pendency was to be reflected in their ACRs.
This will also help the department begin with a clean slate when the new direct tax code comes into effect from the next financial year.

Chandra said the CBDT will, by June, notify guidelines for small salaried tax-payers having annual income of Rs 5 lakh who will not be required to file tax returns if they do not have refund claims.

Such tax-payers will not be required to file return even if they have small interest income. "Any step to help tax-payers would help increase compliance levels," he said.

Chandra says the strategy to have a tax-payer friendly system has paid off as they have managed to collect the higher revised collection target of Rs 4.46 lakh crore in 2010-11.

E-filing, which was formally launched on October 13, 2006, is mandatory for companies but remains optional for individuals.