A remittance tax

Compliance burden should not be increased

A provision in the Union Budget for 2020-21 that is attracting considerable adverse attention deals with remittances abroad. The Budget proposes that if a person remits more than Rs 7 lakh overseas under the Reserve Bank of India’s (RBI’s) Liberalised Remittance Scheme (LRS) — or buys an overseas tour package of that amount from a travel agent — then the bank or agent in question would have to pass on 5 per cent of that amount as tax. The government says this does not count as double taxation although it is on income that is already taxed, because individuals can then adjust it against their tax paid on their returns. The stated reason for this move is that tax officials believe money is being laundered by sending it abroad under the liberalised regime, which permits remittances up to $250,000 a year. 

While the government may be technically correct that this does not count as double taxation, this is another indication that it is not seriously seeking to reduce the compliance burden on ordinary taxpayers. Deduction of money that can only be claimed later should occur when there is a clear payoff for the government; but, in this case, the amounts brought in as tax will be low. There is no clear reason why compliance costs should be increased — and money tied up in the refund process — in the absence of a clear demonstration that the liberalised remittance scheme is being misused on a scale so large as to justify additional controls.

It is possible that the real concern of the government is not that money is being laundered through this process, but that money is being sent overseas. By making the remittance process more difficult, the government might be seeking to dis-incentivise money leaving the country. If so, this would be unfortunate. It would be a throwback to the pre-reform era, when money leaving the country was seen as a problem, and regulations were constantly being imposed to stem the flow. There was a time when the preservation of India’s stock of hard currency was seen as a priority and, therefore, similar measures of control were introduced in order to minimise the transfer of money abroad. But those times should be seen as being long gone. India no longer has to hoard its foreign exchange. Certainly, the individual limits on the remittance of foreign exchange are not so high that the government should feel concerned about capital flight.

The concern is that attempts to save foreign exchange and discourage outflows are broadly in keeping with the recent turn towards trade protectionism. Such measures always have negative effects on businesses. Not only will compliance cost increase, but travel agents can justly point out that their customer base will decrease, because individuals seeking to avoid the hassle of tax being deducted will simply pay by themselves in cash abroad. The government should re-examine the provision. Both the signal it is sending out, and the actual effect on businesses and individuals, will prove to be negative for the economy in the longer term.