Tax collected at source increase: A move to expand tax base?

Indians spent about $1.49 billion on foreign travel, a 50 percent increase from January 2022.

The increase in tax collected at source on money sent abroad and the inclusion of amounts spent overseas using international credit cards in the Liberalised Remittance Scheme (LRS) are steps taken to expand the tax base, according to a member of the Economic Advisory Council to the Prime Minister.

According to the EAC-PM member, who asked not to be identified, when the tax collected at source (TCS) was lower, those who did not file income tax returns and those who did not declare their full income could not claim credit.

With the increase in the TCS rate to 20 percent, which blocks a substantially higher amount of funds, it could prod those who have not been declaring their full income to claim credit, the member said.

The government has been trying to widen the tax base in a country where less than 7 percent of the 1.3 billion population pay income tax. It started a slew of schemes to nudge Indians to declare their income, including the seeding of Permanent Account Numbers with bank accounts.

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The government said in a notification dated May 16 that it had removed the exemption on the use of international credit cards from the LRS for payments made to meet expenses while on a visit outside India. Any spending above the LRS limit of $250,000 annually needs prior approval of the Reserve Bank of India.

The government will also increase the TCS rate on certain remittances covered under LRS, as envisioned in the Finance Act of 2023, with effect from July 1. Remittances for education and medical treatment will be exempt from the new 20 percent rate.

“The payment of TCS is not a final tax,” the finance ministry said in a note. “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 advance tax payments.”

The finance ministry said that if the TCS is of a person who is not a taxpayer, then the 20 percent rate on such presumed income is not high.

According to estimates by the MHA (Bureau of Immigration) and Ministry of Health, about 15 million Indians travel overseas and 100,000 Indians take treatment abroad every year. An estimated 1.2 million Indian students study in foreign universities and colleges.

Indians are spending more than ever on foreign travel. In January, Indians spent about $1.49 billion on foreign travel, a 50 percent increase from January 2022. RBI data shows Indians spent $11.4 billion so far this financial year.

Outflows under the LRS were at $19.61 billion in FY22. According to the EAC-PM member, if this includes even a fraction of individuals who are not declaring their income and the move prompts them to declare their actual income to claim credits, it could add a few thousand crore rupees to the government’s revenue.

Regressive move

Former key bureaucrats slammed the decisions, saying that a major part of LRS goes towards gifts, education and tourism overseas and such a move would only create problems in ease of living.

“It hurts middle-class India. For the middle-class father who borrows money for his children’s education, only the loan is exempt, not other expenses for which parents end up sending money,” said a former bureaucrat.

Another former bureaucrat said this is an attempt to conserve foreign exchange and would discourage people from transferring funds, but neither is a valid objective.

According to experts, when there is a need to increase domestic expenditure, the government is locking away the money of taxpayers in the hope of tracking down some errant individuals.