The mystery of 20% TCS

The imposition of 20 per cent TCS (tax collected at source) on credit card usage abroad, along with a ban on Indians keeping money for more than six months in overseas bank accounts, suggests somebody has examined patterns of overseas expenditures and savings in great detail.

The measures are, however, puzzling at first glance, and near-incomprehensible at second glance. Is this in order to curb overseas travel? Is it in order to bring tax evaders within the net? Is it to discourage (or perhaps to encourage) investing abroad? Will it generate a large interest-free float for the exchequer? The answers all seem to be in the negative.

First, there is nobody, literally nobody, who goes abroad with a forex-enabled credit card and is outside the income-tax net. Given the floor of Rs 7 lakh, before the TCS kicks in, this is guaranteed.

There is also literally no credit-card transaction made anywhere not showing up in banking and tax records. Any movement of money from a rupee-denominated bank account in India to an overseas account, or vice versa, is also flagged automatically. Hence, this measure cannot identify tax evaders.

Will it prevent people travelling? A large proportion of those going abroad do so to study or to work. Of the rest, many are dependent parents with children working abroad. Their expenses are picked up by their children. The tourists are a small set and they can afford the extra expense.

Is it to encourage people to invest abroad in high-risk assets? If you prevent those who earn abroad keeping their money in bank deposits (which is a low-risk investment) you may induce them to look for higher-risk/higher-return instruments. This doesn’t actually induce people who earn abroad to repatriate. Nor does it cut back on imports — the TCS doesn’t apply to ordering Lego kits off Amazon, for example.

Will the measures generate a large interest-free float for the exchequer? Outward-bound tourists spent around $7 billion last fiscal year, and Indian students spent another $5 billion or so.

Much of this will not be on the credit card, or it will be below the Rs 7 lakh limit. A fifth of this total expenditure is about Rs 20,500 crore — about five days of goods and services tax (GST) collection. Given the floor of Rs 7 lakh, the TCS is likely to be one day’s GST collection or less.

If you offset the extra expenses of tracking this, and remember, it has to be eventually refunded, the amount collected is really not worth the trouble.

So is there a secret agenda? The most cynical explanation I’ve come across is that it will allow income-tax officers to leverage the refunds of the TCS to make some “chai pani” in expediting them. But that is hard to believe: The government proudly trumpets the fact that it believes itself to be the least corrupt government India has ever had.

One conspiracy theory is that these measures will somehow block political parties from round-tripping funds back into India for the 2024 elections. Do political parties send money out via normal routes, and let it lie in overseas bank accounts until such time as it is used to buy electoral bonds, or converted into cash and repatriated via the hawala route? But then, what is to prevent this money being used to buy US Treasuries, instead of lying in banks?

Another “behavioural conspiracy” theory suggests this is an emotional electoral experiment like demonetisation. Demonetisation was an economic disaster but there are political analysts who believe it was a prime factor in winning the UP Assembly elections that followed in 2017. Voters were made to suffer; they believed suffering was their patriotic duty and voted for the government that made them suffer. Extending that argument, people who pay the overseas TCS will suffer and they will therefore consider it their patriotic duty to vote for the government that made them suffer.

There is a general principle that fiscal policies should be transparent and have obvious motives. If citizens at large are stretching for unlikely explanations of the nature given above, the government is falling down, either in setting the policy, or in explaining it.