Revenue department working on widening personal income tax base, using data red flags

Data Analytics helps in sending reminders for advance tax payments, identifying mismatches in Income Tax Returns (ITRs) and transactions made by individuals, and spotting potential high-risk transactions. Data analytic techniques can also be used to focus campaigns on high-risk cases from a tax evasion perspective.

Using Artificial Intelligence, and linking data with banks and mutual funds, tax evasion can be prevented, an effort on which the department is focussing.

Using data, it has been found, for instance, that Indians’ spending on foreign travel has increased to pre-Covid levels, the official cited above said.

To plug this compliance gap, the government has hiked the Tax Collection at Source (TCS). A May 16 notification said foreign exchange spending on international credit cards will attract 20 percent TCS. It created a stir among Indians who holiday abroad frequently.

Effective July 1, 2023, the Indian government has raised the TCS rate on foreign remittances under the Liberalised Remittance Scheme (LRS) from 5 percent to 20 percent. On the purchase of overseas tour packages, currently, a TCS of 5 percent is levied. From July 1, 2023, this will be hiked to 20 percent.  There is no threshold for sale on overseas tour program packages.

The May 16 notification on Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023, brought the spending in foreign exchange through international credit cards under the Reserve Bank of India's LRS, which permits Indian residents to send up to $250,000 in a financial year abroad, without prior approval from the central bank.

After the backlash, the government on May 19 said that payments by individuals of up to Rs 7 lakh per annum using their international cards will be exempted.

TCS gets deducted on certain expenses, with the tax authority intending to keep track of them. TCS refunds can be claimed only at the time of filing income tax returns.

Similar to the TCS decision, there have been a couple of other recent tax measures that have raised confusion and consternation among taxpayers.

Angel tax

Angel tax, which was introduced in 2012 to check money laundering, became a controversy after the government threw a curveball in Union Budget 2023 and brought non-resident foreign investors under its ambit. It mandated that a startup’s fundraising could be taxed whenever the funding round took place at a valuation more than the fair value of shares. Since as many as 90 startups had received foreign funding, the decision drew a huge backlash.

In the 2023 Budget, overseas investment in unlisted, closely held companies, except startups recognized by the Department for Promotion of Industry and Internal Trade, were brought under the angel tax net.

After the industry raised concerns, the finance ministry, provided some relief on May 24 when it notified classes of investors who would not come under the angel tax provision.

The notification excluded entities registered with the Securities and Exchange Board of India (Sebi) as Category-I Foreign Portfolio Investors (FPIs), Endowment Funds, Pension Funds, sovereign wealth funds and broad-based pooled investment vehicles from the angel tax. Even other entities with direct or indirect government ownership of 75 percent or more will also be exempt from this, it said.

The ministry notified 21 countries, including the US, UK, France, Australia, Germany, Spain, Austria, Canada, Czech Republic, Belgium, Denmark, Finland, Israel, Italy, Iceland, Japan, Korea, Russia, Norway, New Zealand and Sweden, from where non-resident investment in unlisted Indian startups would not attract angel tax.

The list, however, excluded investment from countries like Singapore, the Netherlands and Mauritius, from where a majority of inbound FDI is channeled into India.

Corporate entities have been kept out of the list, making them potentially liable to angel tax.

Rule 11UA of the Income-tax Rules, 1962, prescribes valuation methods to determine the Fair Market Value (FMV) of assets, including shares of an unlisted company. For unlisted company shares, the FMV is determined based on the following two methods: the net asset value, as reflected in the audited balance sheet of the company; or the discounted cash flow value, as determined by a Category-I merchant banker.

The Central Board of Direct Taxes (CBDT) issued draft valuation rules on May 26 prescribing additional valuation methods proposing that if consideration is received by an Indian private company from a company resident in any of the 21 countries mentioned against issue of unquoted equity shares to such entity, the price of the equity shares corresponding to such consideration may be taken as the FMV of the equity shares for resident and non-resident investors subject to certain conditions. Further, a merchant banker’s valuation certificate — if it is of a date not more than 90 days prior to the date of issue of unquoted equity shares that are the subject matter of valuation — will be acceptable.

Higher STT on futures, options contracts

Union Budget 2023 said the Securities Transaction Tax (STT) on sale of futures would be raised from 0.01 percent to 0.0125 percent and in case of options from 0.017 percent to 0.021 percent. The announcement created confusion as the STT on sale of options was already revised in 2016 to 0.05 percent from 0.017 percent.

After hours of confusion on the size of the STT hike on the sale of options, the finance ministry finally clarified that it will be hiked to Rs 6,250 on a turnover of Rs 1 crore.

STT is a turnover tax paid on the total given or received in sale of stocks, futures, options, mutual funds and exchange-traded funds.