It’s often said that the two constants in life are death and taxes. An interesting insight into human nature is that this constancy seems to extend to how people react to both—with anguish, pain, outrage, and often anger. This is neither a new nor complicated phenomenon.
It’s in fact so entrenched and simple that the Narendra Modi government should ideally have predicted the outrage over the hike in the Tax Collected at Source (TCS) on foreign transactions. The fact that it’s not really a tax cuts no ice. If you’re going to be taking people’s money by fiat, no amount of promises to eventually return it will mollify them.
All you can do is backtrack on 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 backtracking on the TCS issue on foreign transactions is the ThePrint’s Newsmaker of the Week.
United supporters, critics
This tale started several months ago, with Budget 2023 announced on 1 February. Finance Minister Nirmala Sitharaman announced that the rate of TCS applicable on international transactions would be hiked from 5 per cent to 20 per cent, except for payments made for education or healthcare. The minister also brought payments made to book foreign tour packages within the ambit of this TCS.
Earlier, there had been a Rs 7 lakh limit under which this TCS was not applicable. As per the Budget announcement, this limit was removed—foreign transactions of any amount would now attract this higher rate of TCS. The new rates were to kick in from 1 July 2023 (incidentally, today).
At the time, this didn’t make waves, having been overshadowed by all of the other Budget coverage. What did make news, overwhelmingly of the negative kind, was the government notification on 16 May bringing international credit card transactions within the purview of TCS.
Up until then, people travelling abroad felt that they could skip paying the TCS by simply using their credit cards. Suddenly, with the removal of this exemption, the full implications of having to pay 20 per cent more when abroad became apparent to that overly vocal group: India’s elite.
The outrage 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, just a few days later, issued a pretty detailed FAQ document in an attempt to mollify people.
Apart from clarifying several other points, the government also used this document to explain why it had decided to raise the TCS rate to 20 per cent and why it was including credit cards.
“If the TCS payee is a taxpayer, he can claim credit for the TCS as his tax payment against regular income and adjust it against the advance tax, etc., payments accordingly,” the FAQ document said.
Furthermore, it explained that, under the new income tax regime, people earning over Rs 12 lakh anyway had to pay 20 per cent income tax, and those earning above Rs 15 lakh a year had to pay 30 per cent. So, a 20 per cent refundable TCS shouldn’t be a problem, the implication went.
A senior official in the Ministry of Finance had at the time explained to ThePrint that the government had noticed that many high net-worth individuals had been using the credit card exemption to bypass India’s rules on how much citizens could spend abroad, and the government was trying to curb this. The FAQ document reiterated this.
“The differential treatment between debit cards and credit cards needed to be removed in the interest of uniformity and equity in the treatment of modes of drawal of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits,” the document said.
To recap, the Modi government felt that rich people were spending inordinate amounts abroad, wanted to track this expenditure, and was of the view that a 20 per cent TCS wouldn’t pinch the rich anyway.
It sort of made sense, then, that the government later that same day (19 May) issued yet another notification saying that, for credit and debit card transactions, this 20 per cent TCS would be applicable only if foreign transactions were over Rs 7 lakh per year.
This did mollify some critics but again showed how perplexing the government can actually be.
Also read: Govt working to ensure TCS rate hike does not result in cash-flow problems, says CEA Nageswaran
Wonder what’s the idea
Almost immediately, the foreign exchange industry raised an issue, asking why this relaxation was given only to debit and credit cards and excluded cash, wire transfers through banks, prepaid forex cards, and other international payment options widely used by “common people”.
Perhaps realising that some sort of fire-fighting was needed, Chief Economic Advisor in the Ministry of Finance, V Anantha Nageswaran, told industry leaders that the government would do all it could to ensure that business people would not face a cash-flow problem. It was not clear if this was taken at face value. Businessmen and the Income Tax Department have historically not been the best of pals.
Another issue that has recently emerged is that banks don’t actually have a way to check how much you spend abroad. This means that there’s no way of checking if the Rs 7 lakh limit has been crossed or not. Banks were fully prepared to levy the 20 per cent TCS regardless of how much you spent abroad.
As is the case with any tax, there also soon emerged a number of (perfectly legal) ways to evade it. The deadline was drawing nearer, and the jitters were growing among tourists, businesspeople, banks, money-changers, and pretty much everybody involved with foreign travel.
Fast-forward to this week. On 28 June, the government, mere days before the deadline, announced “important changes” to the TCS system.
First, it said that credit cards would not attract the 20 per cent TCS. However, here too, simplicity eluded it. If you use your credit card while abroad, there would be no TCS. But if you use your credit card while in India and spend internationally, the 20 per cent TCS would apply on expenditure exceeding Rs 7 lakh.
So, that’s the May notification undone and somehow simultaneously further complicated. Good job.
The government also said that it was reimposing the Rs 7 lakh limit under which no TCS would be applicable for all other modes of payment. Unfortunately, the 20 per cent rate would continue. That’s the Union Budget announcement diluted. Well done.
Regarding foreign tour packages, the policy seems to have gone an extra step to confound. If you spend less than Rs 7 lakh on foreign tour packages, you’ll attract a TCS of 5 per cent. Above Rs 7 lakh, and you’ll have to pay TCS at 20 per cent. Presumably, the 15 percentage point jump at the Rs 7 lakh mark somehow enhances the government’s ability to track foreign spending. A lack of logic hasn’t stopped the government before, so why should it start now?
All of these new changes are now supposed to kick in from 1 October 2023, three months after the initial deadline. That’s three months to further confuse, complicate, and confound.
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(Edited by Prashant)