Recent TCS changes will push people back to informal forex markets: Analysts

Online gaming platforms will not be required to deduct tax at the source for a player if the net winning does not exceed Rs 100.

Lawyers have opined that a 20 percent tax collected at source (TCS) on spending on international credit cards will push people to source foreign exchange from informal markets.

The finance ministry on May 16 notified the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023, saying that henceforth, spending in foreign exchange through international debit and credit cards will be covered under the Reserve Bank of India's liberalised remittance scheme (LRS).

All international transactions made using credit cards when outside India have been brought under the RBI’s LRS, which permits Indian residents to send up to $250,000 in a financial year abroad, without prior approval from the central bank. This has come into effect from May 16, 2023, as per a notification by the Ministry of Finance in the Gazette of India.

Spends beyond a transaction value of Rs 7 lakh currently attract a levy of 5 percent TCS. But this rate is applicable only up to June 30, 2023. From July 1, these credit card transactions will attract a higher TCS rate of 20 percent with no minimum threshold, the gazette notification read. However, the ministry on May 19 clarified that it has exempted TCS on international card expenses up to Rs 7 lakh per financial year.

Legal experts have noted that businessmen and others who frequently travel abroad may cross the Rs 7 lakh limit easily and upon crossing it, may choose to source foreign exchange currencies from informal markets.

An unnecessary burden:

Senior advocate Sanjoy Ghose noted that the move was not required when the government is encouraging citizens to move from the informal economy to the formal economy, especially when the rate is as high as 20 percent.

He said, “The government has undertaken many exercises in the past, such as demonetisation, to push people into formalising their sources of income. The changes to TCS are akin to terrorising the citizens for having made the choice which the government wanted them to make in the first place. Earlier, people were taking foreign exchange from the informal market, through illegal means, such as hawala or black markets. With this move, there is a chance that the situation could go back to this.”

He opined that when the government was moving towards formalisation and regulation with Aadhaar, Know Your Customer (KYC), and PAN card, the new measure is two steps backwards.

Ghose said “Firstly, it is not easy to get a credit card or a debit card with the amount of background checks that is done before it is issued. Secondly, every expenditure on a credit or debit card is easily traceable and is accounted for. Under these circumstances, I fail to understand why the government would want to impose this kind of burden on a person.”

Could boost informal channels

Pallav Pradhyuman, partner at law firm CNK and Associates, said, “There are two schools of thought on this issue, the first being that air and foreign travel being Veblen goods (a Veblen good is one for which demand rises with a rise in its price) will see an uptick in demand from the wealthier classes which will be eager to brush off the effects of the 20 percent TCS. At the same time, there will be others who will be keen to avoid the 20 percent cash flow restriction as well as the reporting requirements that this entails.” He thus notes that there is a definite chance that the latter group of people will try to access the informal forex market.

Discourages individuals from engaging in foreign transactions

Ankit Jain, partner at Ved Jain and Associates, a Delhi-based chartered accountancy firm, notes that the high TCS rate might force individuals who desire to avoid the tax to resort to this channel, which is largely unregulated and carries its own risks. Not only would this risk an increase in untracked, informal transactions, it could also inadvertently fuel a black market for forex exchange, which goes against the principles of a transparent and fair tax system.

According to Jain, “High TCS could discourage individuals from engaging in foreign transactions and travel unless absolutely necessary. This avoidance behaviour, spurred on by the 20 percent rate, may negatively impact sectors reliant on these transactions, including tourism, international e-commerce and others.”

He added that the stringent nature of the tax could push individuals to explore alternative channels for foreign transactions. For instance, some might choose to leverage their company's expense limits, given that company expenses are not typically covered under the LRS. This, in turn, could lead to a rise in corporate transactions and a potential decrease in personal foreign transactions, he said.

The prudent would opt against riskier alternatives

Keshav Singhania, head of private client practice at law firm Singhania and Co, notes that the threshold limit should be enough for the majority of Indians, barring the likes of high net-worth individuals (HNIs) who prefer to splurge on more luxuries. However, even for frequent travelers and HNIs, alternatives such as tapping the informal forex markets is not advisable.

He said, “Accordingly, a prudent audience would opt against other riskier alternatives to bridge a fund flow timing issue.”