IIt is often said that the two constants in life are death and taxes. An interesting insight into human nature is that this stability extends to how people react to both – with anguish, pain, resentment and often anger. This is neither a new nor a complex phenomenon.
It is so deep and simple, in fact, that the Narendra Modi government should ideally have predicted the outrage over the hike in Tax Collection at Source (TCS) on foreign transactions. The fact that it’s not actually a tax cut isn’t snow. If you’re going to take people’s money legally, no amount of promises to eventually return it will placate them.
All you can do is retreat from the most problematic elements of your policy and dilute the rest. This is what the government has been forced to do, and that is why its backlash on the TCS issue on foreign transactions is this week’s news maker for ThePrint.
united supporter, critic
This story began several months back with the announcement of Budget 2023 on February 1. Finance Minister Nirmala Sitharaman announced that the rate of TCS applicable on international transactions, except for payments made for education or healthcare, will be increased from 5 per cent to 20 per cent. The minister also brought payments made for booking foreign tour packages under the purview of this TCS.
Earlier there was a limit of Rs 7 lakh below which this TCS was not applicable. As per the budget announcement, this cap was removed – foreign transactions of any amount will now attract a higher rate of TCS. The new rates were to come into effect from July 1, 2023 (incidentally, today).
At the time, it didn’t make a stir, it had an impact on all other budget coverage. What turned out to be largely negative news was the May 16 government notification bringing international credit card transactions under the ambit of TCS.
Till then, people traveling abroad felt that they could skip paying TCS by just using their credit cards. Suddenly, with the removal of this exemption, the full implications of paying 20 per cent more abroad became apparent to that most vocal group: India’s elite.
The outcry was immediate and loud. Notably, it was also bipartisan, with government critics and supporters displaying a rare consensus on the issue.
Perhaps due to this widespread criticism, the Ministry of Finance after a few days. Issued A fairly detailed FAQ document in an attempt to calm people down.
Apart from clarifying several other points, the government also used this document to explain why it had decided to increase the TCS rate to 20 per cent and why credit cards were included in it.
The FAQ document states, “If the TCS recipient is a taxpayer, he can claim credit for TCS as his tax paid against regular income and adjust the same against advance tax etc. paid.”
Furthermore, it pointed out that, under the new income tax regime, people earning more than Rs 12 lakh had to pay 20 per cent income tax anyway, and those earning more than Rs 15 lakh a year had to pay 30 per cent . Therefore, the 20 per cent refundable TCS should not be a problem, it was implied.
A senior finance ministry official told ThePrint at the time that the government had observed that many high-net-worth individuals were using credit card exemptions to circumvent India’s rules on how much citizens can spend abroad , And the government was paying attention to it. Efforts are being made to curb this. The FAQ doc reiterates this.
“In the interest of uniformity and equity in the treatment of methods of withdrawal of foreign exchange and for prudent foreign exchange management, there is a need to remove differential treatment between debit cards and credit cards to capture aggregate expenditure under LRS and prevent bypass Is. LRS limits,” the document said.
In short, the Modi government felt that the rich were spending exorbitant amounts abroad, wanted to keep a check on this spending, and was of the view that the 20 per cent TCS would not affect the rich in any way.
It is understood, then, that the government later on the same day (May 19) issued another notification Having said that, for credit and debit card transactions, this 20 per cent TCS would be applicable only if the foreign transaction exceeds Rs 7 lakh per annum.
This mollified some critics but again showed just how confused the government really can be.
Read also: CEA Nageswaran says govt working to ensure TCS rate hike doesn’t result in cash flow problems
Wonder what’s the idea?
Almost immediately, the forex industry raised One issue asked why this exemption was given only to debit and credit cards and not cash, wire transfers through banks, prepaid forex cards and other international payment options widely used by “common people”. Why was excluded?
Perhaps realizing that some sort of firefighting was needed, V Ananth Nageswaran, chief economic advisor in the finance ministry, Said Industry leaders said the government would make every effort to ensure that businessmen do not face cash-flow problems. It was not clear whether this was taken at face value. Businessmen and the Income Tax Department have historically not been the best of friends.
one more Issue It has come to light recently that banks really have no way of checking how much you spend abroad. This means that there is no way to check whether the limit of Rs 7 lakh has been crossed or not. Banks were all set to levy 20 per cent TCS, irrespective of how much you spent abroad.
As is the case with any tax, there is also soon emerged Several (perfectly legal) ways to avoid it. The deadline was approaching, and panic was growing among tourists, traders, banks, money-changers and almost everyone involved with foreign travel.
Fast forward to this week. On June 28, just a few days before the deadline, the government announced “Significant Changes” in TCS System.
Firstly, it said that 20 per cent TCS will not be applicable on credit cards. However, even here simplicity was far from over. If you use your credit card abroad, there will be no TCS. But if you use your credit card while living in India and spend internationally, 20 per cent TCS will be applicable on the spend above Rs 7 lakh.
So, this May notification is undone as well as somehow more complicated. good job.
The government also said that it is reintroducing the Rs 7 lakh limit under which no TCS will be applicable on all other modes of payment. Unfortunately, the 20 percent rate will continue. This has diluted the announcement of the Union Budget. Very good.
With regard to foreign tour packages, the policy seems to be taking an extra step to confuse. If you spend less than Rs 7 lakh on foreign tour packages, you will be charged TCS of 5 per cent. Above Rs 7 lakh, and you have to pay 20 per cent TCS. Presumably, the 15 percentage point jump at the Rs 7 lakh level somehow reflects the government’s ability to track foreign spending. Lack of logic hasn’t stopped the government before, so why should it start now?
All these new changes are now set to come into effect from October 1, 2023, three months after the initial deadline. That’s three more months to confuse, muddle and confuse.
Thoughts are personal.
(Edited by Prashant)