The drama over the past week, around the 20% tax collected at source (TCS) on credit card transactions abroad—beyond a certain threshold—is a grim reminder to policymakers that it is better to consult instead of confusing stakeholders.
But we have seen it in the past too. During the demonetisation of 2016, many were driven to despair due to the changes in rules almost on a daily basis. In the last few days, we have seen a significant amount of outrage over TCS, and of course, quite a few clarifications as well.
The latest clarification, among others, says that expenditures up to `7 lakh will continue to attract 5%, and the 20% TCS will only kick in after that. But let’s forget the number of people being impacted by the 20% TCS or the threshold amount of `7 lakh. What is more important is the intent.
When Union Budget 2020-21 introduced the tax at 5%, PC Mody, then-chairman of the Central Board of Direct Taxes (CBDT), argued that a government study had come across instances of mismatches in the returns profiles of remitters, and it was just a case of cataloguing remittances and matching returns—an argument that survives even today.
However, cataloguing or tracking can be done even with a 0.5% tax. After all, the expenses are not being made in cash or through hawala channels but through credit cards and other banking routes. So, there is no need to actually charge 5% or 20% for expenses of over `7 lakh or any amount.
Imagine this: A retired couple with only a pension income of, say, `10 lakh or less annually, but with significant savings, can afford a trip abroad. They may want to spend any amount of money from their savings. So, why is the government trying to curb their spending by charging 20%? After all, it is their post-tax income.
Another example: Most people weren’t able to travel during the Covid induced lockdown. So once the world opened up, people rushed out
to eat, shop and, travel. The number of travellers went up substantially by almost 190%, according to reports.
In their zeal to compensate for lost time, many would have made expenses that perhaps cannot be justified by annual returned incomes.
One could have understood the tax as a deterrent if foreign exchange reserves were dangerously low. But forex reserves are at a comfortable $599.5 billion, a one-year high and not too far away from the all-time high of $642 billion.
So, why would any government introduce such a tax? More importantly, since the government is not paying any interest on the blocked amount, why should it seek a free float for 12 or 18 months? And most importantly, why have an adversarial relationship with the taxpayer?
Unfortunately, there are no concrete answers. The best one can assume is that after imposing a 5% TCS, the tax department realised that very few people were willing to go through all the trouble to reclaim the blocked amount as it was a small percentage point.
So, perhaps, it advised the government to increase the percentage to boost tax collections, hoping taxpayers will ignore this too. But one doubts that 20% will not be contested.
Then comes the next problem—the rise in the number of disputes. It is no secret that tax disputes have been consistently on the rise.
The amount under dispute has been going up consistently and stands at an unhealthy `5.58 trillion (taxes on income other than corporation tax), as of the reporting year 2021-22 (Source: Budget document).
And if one does include the entire tax amount under dispute, including corporation, services, and others, it is at `12 trillion.
While the government has introduced schemes like Sabka Vishwas, Vivad Se Vishwas, and faceless assessment to reduce the burden, the amount under tax disputes has continued to rise.
Laws like these can only spawn more disputes in the future. In other words, the system of ‘collect now, correct later’ needs to change.
The question that lawmakers need to ask themselves is quite simple: Has the taxpayer done something illegal? If so, how do we catch or penalise them? The answer doesn’t lie in making every taxpayer pay for the crimes of a few.
The Aadhaar-PAN linkage was supposed to enable banks and the income tax department keep track of every single transaction of every Indian citizen. One therefore assumes that any expenditure, especially those made through credit or debit cards, cheques, net banking or digital methods such as UPI, cannot be hidden or shrouded in mystery—even if made in the name of minors or shown as business expenses.
The anguish of taxpayers at being asked to furnish surety of their honesty, repeatedly, is quite understandable.