The rise of revenue department

The rollback in TCS rates for remittances reveals a pre-reform mindset of tax collectors

On June 28, the government announced yet another change — the third since February 2023 — in its system of tax collection at source (TCS) on payments under the Liberalised Remittance Scheme (LRS) and overseas tour packages.

The first change was announced on February 1, 2023, when the Budget for 2023-24 was presented. Accordingly, the annual threshold of Rs 7 lakh for triggering the levy of TCS on remittances under the LRS was to be removed from July 1, 2023. In other words, the TCS levy was to be applied on all LRS remittances. Moreover, the rate of TCS was to be raised from 5 per cent to 20 per cent for both remittances under the LRS and for purchases of overseas tour packages.

Three and a half months later, the finance ministry further tightened the TCS regime under the LRS. On May 16, it modified the current account transaction rules to remove the differential treatment for credit cards vis-à-vis other modes of drawing foreign exchange under the LRS. This effectively meant that credit card payments of foreign exchange bills also came under the LRS norms and, therefore, would attract TCS at the new rate of 20 per cent from July 1, 2023.

The third change was announced on June 28, which according to the government was based on a review of the various comments and suggestions it received in the wake of the decisions announced in the Budget and on May 16.

Effectively, the third change was a rollback. According to this decision, the rate of TCS for all remittances under the LRS and for overseas tour packages, regardless of the mode of payment, became zero for amounts up to Rs 7 lakh per individual per annum. But beyond the threshold of Rs 7 lakh, TCS was to be levied at 0.5 per cent for remittances for education financed through education loans, at 5 per cent for remittances for education or medical treatment, and at 20 per cent for other remittances. And the new rates would become effective from October 1, 2023.

A bigger rollback was the annulment of the changes introduced on May 16 through a notification to bring all credit card payments for international transactions under the LRS and, therefore, a TCS levy of 20 per cent. In other words, transactions on credit cards while being overseas were exempted from the LRS.

Note that these decisions, which were later rolled back, were announced originally through the Budget or as a follow-up to the Budget initiatives. Budget decisions are not usually announced without a thorough review within the government. In many cases, finance ministry representatives also evaluate the implications of any proposal through discreet consultations with some stakeholders and then include them in the Budget.

Indeed, soon after the Budget announcement, the increase in the rate of TCS for LRS remittances was sought to be justified on the grounds that the government needed to track such transactions that could have escaped the tax net. But few saw any justification for the move on this ground alone.

After all, remittances or international credit card payments always used the banking route, leaving a trail for the tax department to monitor and detect any tax evasion. In any case, if the TCS was used to track such transactions, what was the need for increasing its rate from 5 per cent to 20 per cent? Was that a way of collecting more revenues in the interim since refunds, if any, would be made only after a year once the annual returns would be filed?

Either way, the entire TCS rollback on LRS remittances provided a glimpse of how the revenue department in the finance ministry has begun experimenting with tax initiatives that are not friendly to the taxpayers. It also gave rise to a perception that the department has gone back to its old ways. Its role had been gradually whittled down after the economic reforms of the 1990s. First, import duties were cut quite steeply in the 1990s and in small doses in subsequent years. A reduction in direct taxes and rationalisation of the rates into fewer slabs also meant a dilution in the interventionist role that the revenue department was used to playing earlier.

Whatever role it could play while tinkering with excise rates was also taken out of its direct purview with the launch of the goods and services tax (GST) in July 2017. It was virtually left with administering the collection of taxes that had been simplified and rationalised, with reduced scope for discretion. The initiatives on faceless scrutiny of assessments in direct taxes and the use of technology in the allocation of responsibility for conducting such assessments helped taxpayers, but the revenue department was rapidly losing its earlier power.

Things changed somewhat with the selective increase in import duties for items from the 2018 Budget onwards. It could be argued that the revenue department had begun to reclaim the relevance that it had lost in the wake of reforms through duty cuts, rate rationalisation, GST launch and faceless scrutiny of direct tax assessments.

Similarly, the TCS changes for LRS remittances bore the imprint of a revenue department of the pre-reform days. Fortunately, the damage that was sought to be inflicted was minimised through the rollback of the earlier decision.  But the mindset has undoubtedly changed and that regression in thinking is not a good sign. India’s taxation system needs to embrace and nurture a regime that is free from discretion, providing a transparent mechanism and enhancing the ease of taxpayers.