Opinion Chief Economic Advisor writes: Tax on international credit card transactions is fair

Those claiming that tax on LRS is perverse miss the point, spread unnecessary panic

chief economic adviser writes on the new rules to foreign credit card transactions

It is equally important for honest taxpayers to join in and support the government in promoting a fair, easy, and compliant taxation system in the country. (Photo: Pixabay/ File)

V Anantha Nageswaran

May 20, 2023 05:50 PM IST First published on: May 20, 2023 at 07:07 AM IST

“A perverse tax”, “a sledgehammer approach” and “retrograde” are some of the emotive reactions to the recent announcement that foreign payments through credit cards will be brought within the purview of Liberalised Remittance Scheme (LRS) and the consequential impact of the applicability of tax collection at source (TCS) on such payments. These hyperbolic statements, along with sweeping remarks such as “tax terrorism”, “perverse”, a “broken-down tax assessment system”, etc, exaggerate the scale of the issue, stirring unnecessary panic among the public. In the process, the intent behind this move and its real impact has been completely lost sight of.

The attempt to confuse the recent announcement about TCS on credit card payments must be put to rest first. There is a need to step back and understand the concept, construct and consequence of this “interim” tax collection measure. As a concept, TCS is not a final tax. It is adjustable against the advance tax payable by any person during the financial year and from the final tax payable when filing returns. It is not an additional levy for those individuals who include all their income in their tax returns.

It is a fact that remittances under LRS have increased multi-fold in the last few years, and as per data published by the Reserve Bank of India (RBI), LRS remittances which were Rs 0.9 trillion in FY2019, crossed Rs 2 trillion in FY2023. During FY2023, an interesting trend was noticed in the remittances for deposits, purchase of immovable property, investment in equity/debt, gifts/donations and travel. Remittances under these heads constituted almost 70 per cent of the total, representing a year-on-year growth of 74 per cent. Foreign travel alone was almost Rs 1.1 trillion in FY2023, a three-fold increase from the pre-Covid period. In all of these, payments made through credit cards are not reflected as such payments were not subject to the LRS limit. This is an anomaly that needed to be fixed anyway.

In 2020, when TCS was first brought in on LRS remittances, a modest rate of 5 per cent was introduced with a threshold of Rs 7 lakh. This was done to track foreign spending disproportionate to returned income. It was also expected that this would nudge people to come forward and file tax returns. Unfortunately, the system was circumvented in multiple ways, primarily by splitting payments in the name of multiple individuals – minors, household staff, etc. Also, in many cases, the 5 per cent tax was absorbed as a cost and not claimed by filing a return.

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Possibly for these reasons, the government had to step in to bring changes in the recent budget: (1) removing the threshold for all payments other than education and medical expenses, and (2) increasing the rate of TCS from 5 per cent to 20 per cent. It is reiterated that the rate of TCS of 5 per cent and Rs 7 lakh threshold still applies for education and medical expenses (including incidental expenses). Further, remittance out of educational loans would be subject to TCS of 0.5 per cent only. The higher rate of TCS is only for investments, gifts, donations and overseas travel. The government has also clarified that payments made by an individual using their international debit or credit cards up to Rs 7 lakh per financial year will be excluded from the LRS limits and will not attract TCS.

Now turning to the issues of tax terrorism and other concerns, which have been raised almost as a sequel to TCS on LRS. These remarks may be out of context when one considers the intent and impact of TCS as narrated above. Nevertheless, it is important to address these issues as well.

Firstly, the tax rates for corporates were significantly reduced in 2019 to attract more investments and facilitate job creation. Second, a simpler tax regime for individuals that placed a lesser burden on them for computing various deductions and exemptions was also introduced. This has been made more attractive in the recent budget. A facility for filing updated tax returns for genuine omissions of reporting has been extended, which has been met with great response. Third, faceless assessment has been implemented in the assessment process, reducing touch points with the tax administration and facilitating the faster resolution of concerns and issues. The time limit to reopen assessments was reduced from six to three years. An extended period of 10 years is applicable only in case of information regarding tax evasion. Scrutiny and enforcement are used only in apparent tax avoidance and deliberate tax evasion cases.

Fourth, technology has been leveraged effectively to ease the burden of compliance by reducing the complexity of filing, providing pre-filled returns and the faster issue of refunds. As the Finance Minister stated in her recent budget speech, the income tax portal received a maximum of 72 lakh returns daily. It processed more than 6.5 crore returns last year, with the average processing period reduced from 93 days in 2013-14 to 16 days. Almost 45 per cent of the returns were processed within 24 hours.

Lastly, concerns are well acknowledged on the litigation issue, and the government has taken multiple steps to reduce the amount locked up in tax disputes. To name a few – the reduction in the threshold amount for filing of appeals by the revenue department, the vivad-se-vishwas scheme (tax disputes resolution scheme), the new provision to avoid the filing of repetitive appeals, setting up of dispute resolution committee for resolution of low tax disputes, the constitution of a local committee to deal with taxpayer’s grievances from high pitched assessments and the recent amendment to bring a new appellate forum of Joint Commissioner (Appeals) for handling routine matters of tax disputes.

While the debate on the role of tax administration in providing justice and ease of life for honest taxpayers is well intended and taken in the right spirit, it is important to acknowledge the government’s genuine efforts in that direction. It is also equally important for honest taxpayers to join in and support the government in promoting a fair, easy, and compliant taxation system in the country.

The writer is Chief Economic Advisor, Ministry of Finance, Government of India. Views are personal