New Delhi: According to Chief Economic Advisor (CEA) V. Ananth Nageswaran, the government is working on a mechanism where tax deducted at source (TDS) for salaried employees will automatically come down if they are required to pay tax at source on foreign transactions. (TCS) has to be paid. ,
At an annual event organized by the Confederation of Indian Industry (CII) on Thursday, the CEA also explained the government’s rationale for increasing the rate of TCS levied on international transactions.
Finance Minister Nirmala Sitharaman in her budget speech had said that from July 1, the rate of TCS applicable on most foreign transactions would be raised to 20 per cent from the previous 5 per cent.
On May 16, the finance ministry announced that international credit card transactions would also be covered under these rules.
While TCS is adjusted against the final tax payable at the end of the year, and hence is not strictly a tax, TDS is deducted from the monthly salary of the employee before it is credited to his account.
Credit card inclusion decision incited anger from businessmen, economists and politicians, who said it would place a disproportionate compliance burden on honest taxpayers.
Soon after, the government relented and clarified TCS will be levied only on international transactions above Rs 7 lakh in a financial year.
Now, according to Nageswaran, efforts are being made to mitigate another major concern – that the higher TCS rate will create cash-flow problems as the amount will be locked up with the government till the end of the financial year.
“First of all, they (government) have exempted transactions up to Rs 7 lakh from this TCS, so transactions done by most of us will not be covered under this levy,” the chief economic advisor said.
“There is also an effort to link TCS with your tax deducted at source, such that if TCS is being paid by you, it will have to be reflected in the lower tax deducted at source,” he said. “It’s just a matter of making sure you’re not bogged down from a cash-flow perspective.”
Nageswaran said this would provide relief to those who are worried about this “resentment or irritation” over levy of TCS in addition to TDS. This is an issue that was raised by some critics of the TCS hike, who complained that it would tax income that is already taxed.
A major point raised by bankers was that if the purpose of TCS was to track transactions, as it has traditionally been intended, even 1 per cent TCS would have worked. His argument was that 20 per cent TCS was not required.
However, the CEA argued that the low rate of TCS was not acting as a major deterrent to tax evaders.
“One view is being taken that you (the government) need to make TCS 1 per cent or 5 per cent so that you can track it,” he said. “But there are people who are happy to be out of the tax bracket if it’s 1 percent or 5 percent.”
“It’s still a price worth paying for them,” Nageswaran explained. “So there should also be a deterrent effect, while at the same time, without upsetting the people who are going to pay their taxes.”
He said that, contrary to the view that there were only a small number of people who were abusing the rules relating to foreign transactions, government data showed that the quantum involved in such tax is “quite substantial”.
(Edited by Tony Rae)
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