Remittances high, low tax payment: Govt tighens net with TCS hike

Finance Secretary T V Somanathan said the measures have been taken based on information that people are making high-value remittances but their tax returns are not reflecting proportionate income tax payments. “It is our impression and there is enough information to indicate that there are quite a lot of people who are able to make these remittances but whose tax returns are disproportionately low compared to what they send as remittances. So that means if you don’t collect tax at source, then you have to take measures later to catch them. That is much more difficult. If you are able to make remittances to invest in a property in Manhattan, or a stock brokerage account in Dubai or if you are going to take a 30-day tour of the world, almost certainly your effective tax rate will be 20 per cent,” he said.

The Finance Bill, through the Budget 2023-24, amended Section 206C of the Income Tax Act levying a higher TCS on overseas tour programme packages. Also, 20 per cent TCS will be applicable on certain remittances without any threshold as against the current scenario of 5 per cent tax rate where funds in excess of Rs 7 lakh are sent out of India under the Liberalised Remittance Scheme of the RBI. The amendments will come into effect from July 1, 2023.

The government’s underlying view in taking these tax rationalisation measures in the Union Budget for 2023-24 for high net worth individuals has been to reduce ways for tax avoidance by such individuals. “If you look at high net worth individuals there are a number of tax avoidance removal measures in this Budget. You look at market-linked debentures, very high value insurance policies, marginal (tax) rate is coming down but some of the devices used predominantly by those in the highest tax rate are also being rationalised. So it’s not necessarily a net reduction, it’s a reduction from a high marginal rate inducing certain avoidance devices, to a lower rate with fewer opportunities to avoid,” Somanathan said.

In similar measures, the Budget for FY24 has also proposed that maturities of life insurance policies with an annual premium of Rs 5 lakh and above taken after April 2023 will now be taxed. The Budget for 2023-24 also proposed to cap deduction from capital gains on investment in the residential house to Rs 10 crore.

Amit Maheshwari, Tax Partner at AKM Global said, “TCS has been proposed on any foreign payment without any threshold. This would pose challenges for people intending to go for foreign travel and who wish to invest in overseas stocks as it will increase their immediate outlay.”

Nangia Andersen India Partner Amit Agrawal said the increase in TCS rate to 20 per cent is a big surprise, especially with the comfortable forex position. “The increase in TCS rates to 20 per cent for overseas travel perhaps underscores the government’s intention to restrict overseas travel spending by HNIs,” Agarwal said, adding that the step to increase TCS to 20 per cent for all remittances, other than travel and medical is likely to cause resentment and hardship amongst the middle class and HNIs.