On June 28, the government announced yet another change in the Liberalized Remittance Scheme (LRS) and the tax deduction at source (TCS) regime in case of foreign tour packages.
This is the third major change in this sector since February 2023.
The first change was announced on February 1, 2023 when the budget for 2023-24 was presented.
Accordingly, the limit of Rs 7 lakh for activating TCS on remittance abroad under LRS was to be abolished from July 1, 2023.
In other words, TCS was to be made applicable on all LRS remittances. TCS rates were also to be increased from 5 per cent to 20 per cent in both cases of remittances under LRS and purchase of foreign tour packages.
Three and a half months later, the Finance Ministry tightened the TCS regime under the LRS.
It amended the current account transaction rules on May 16 to remove the distinction between credit card and other mode of transactions under LRS.
This effectively meant that credit card payments made for payment of foreign currency bills were also going to come under LRS norms.
Therefore, from July 1, 2023, TCS was going to be imposed on that too at the rate of 20 per cent.
The third change was announced on 28 June.
According to the government, it was based on comments and suggestions that it had received in the context of the budget and the decisions announced on May 16.
Effectively, the third change was actually a retreat from earlier decisions.
According to this decision, the rate of TCS on all types of remittances related to LRS and foreign tours has been reduced to zero per person up to Rs 7 lakh per annum. During this time the mode of payment did not matter.
Provided that beyond the limit of Rs 7 lakh, TCS at the rate of 0.5 per cent on remittances made to repay education loan, 5 per cent for education or medical and 20 per cent for other remittances. Went.
The new rates will become effective from October 1, 2023.
An even bigger twist in the rules was the change announced on May 16, where credit card payments for international transactions were taken out of the purview of the LRS, thus attracting a 20 per cent levy.
TCS was also abolished. In other words, credit card transactions abroad have been excluded from the LRS.
It is worth noting that these decisions, which were later rolled back, were announced either in the budget or in the post-budget follow-up.
Budget decisions are usually announced without proper review within the government.
In many cases, even representatives of the finance ministry quietly discuss the implications of a proposal with some stakeholders and only then include it in the budget.
Immediately after the budget announcement, an attempt was made to justify the TCS rate on LRS remittances on the grounds that the government needed to keep a check on transactions that lead to tax evasion.
After all, remittances or international credit card payments always use the banking route, giving the tax department an opportunity to track tax evasion and detect potential cases.
In any case, if TCS was to be used to monitor such transactions, then what was the need to increase the rate from 5 per cent to 20 per cent? Was it a ploy to generate more revenue in the interim as the refund would have to be given only after a year when the annual returns were filed?
In any case, the withdrawal of TCS on LRS remittances is a glimpse of how the Department of Revenue, Ministry of Finance, has started experimenting with tax initiatives that are not very taxpayer friendly.
This also indicates that the department is adopting old methods.
After the economic reforms of the 1990s, its role was gradually limited. Import duties were first cut sharply in the 1990s and gradually reduced in subsequent years.
Reduction in direct taxes and rationalization of rates meant reducing the interventionist role of the revenue department.
Ever since the introduction of the Goods and Services Tax (GST) in July 2017, excise duty rates were moved beyond its direct monitoring.
In such a situation, he was left with only the work of general tax collection and he did not have any special discretionary rights.
Faceless monitoring for assessment of direct tax cases and use of technology in allocation of responsibility for such assessment has helped taxpayers.
But the revenue department was rapidly losing its old powers.
Things changed after the 2018 budget selectively increased import duties on goods.
It can be said that the Department of Revenue has started trying to regain its relevance which it had lost after reduction in duty rates, introduction of GST, rationalization of rates and faceless assessment of taxes.
Similarly, the change in TCS for LRS remittances gives a glimpse of the Department of Revenue in the pre-reform days.
Fortunately, the damage that was predicted was minimized by rolling back the earlier decision.
But the mindset has undoubtedly changed and this oldness in thoughts does not bode well.
India’s tax system has to adopt a system that is completely free from arbitrariness, provides a transparent system and makes things easy for the taxpayers.