Around 2.2 million income tax payers, including nearly 400,000 companies, who filed their tax returns online in 2007-08, are in for a rude shock. Their returns have not been processed by the tax department. As a result, these taxpayers, including leading companies, are yet to receive refunds, leading to questions about the efficacy of the system.

This delay comes as a huge blow to the credibility of the nascent electronic tax return filing initiative that promised to make filing tax returns and getting refunds easier and faster.

Adding to the discomfort is the fact that paper returns are being processed as usual with refund money flowing back into taxpayers' accounts.

The blame is being laid at the door of technology, or the lack of it. Apparently, the software required to process the returns is not yet ready. Income tax officials admitted that the software to process e-returns should also have been ready, but developing the required programme was taking time. Officials declined to commit a timeframe by when the software would be ready.

e-Filing has become popular since it was introduced in 2004-05. It is mandatory for companies as well as partnership firms, Hindu Undivided Families (HUFs) and professionals having income beyond a specific threshold limit. It is currently optional for salaried individuals, pensioners and self-employed taxpayers.

In 2007-08, over 30 million returns were filed in the country. Of these, around 2.2 million were filed online, a huge five-fold increase over the 0.37 million filed in 2006-07. The interest in e-filing has prompted the department to set an internal target of getting 5 million taxpayers to file their returns online in 2008-09.

However, the delay in processing and refunds could dampen enthusiasm for the service.

Direct tax collections were around Rs 3,12,000 crore (Rs 3,120 billion) in 2007-08, of which companies accounted for 60 per cent. Tax refunds stood at Rs 37,000 crore (Rs 370 billion) in 2006-07, rising to Rs 40,700 crore (Rs 407 billion) in 2007-08. As much as 75 per cent of the refunds went to companies.

The data show that out of 2.2 million e-returns, 1.44 million or 66 per cent returns were filed voluntarily by individual taxpayers. About 27 per cent of the tax returns were filed between 6.00 pm and 9.00 am, which means assessees were probably filing after work hours and when Internet connectivity is faster.