Credit card tax cut, oversight still futile
An about-face is rarely good in policy-making, but the Ministry of Finance did not shy away from rolling back the contentious decision to tax overseas credit card transactions from July 1. Considering the backlash from taxpayers, the government did a 180 and withdrew the notification that was issued 48 hours earlier. The ink was barely dry, but officials seem to have realised their policy mistake and admitted the need to avoid ‘procedural ambiguity’ in our taxation laws. While this is welcome, what’s puzzling, though, is the adamant view with which the notification was issued in the first place. The proposal was first introduced two years ago and subsequently announced in Budget 2023. Policy watchers have voiced concerns about the futility of including overseas credit card transactions under the Liberalised Remittance Scheme (LRS) with a fresh levy of 20% Tax Collected at Source (TCS) since. Thankfully, it’s neatly scraped out of the policy lexicon.
Proceeding with the notification would have made overseas cash transactions attractive, reversing the gains made via digital payments and constraining taxpayers’ cash flows. It would have added compliance complexity to the ongoing efforts of simplifying India’s taxation regime. Credit card spending incurred during overseas travel was never part of the LRS limit, and the government was eager to bring parity with debit cards and travel cards. Their reasoning for arresting tax evasion and encouraging domestic tourism was dismissed as bureaucratic argle-bargle.
According to RBI data, international travel constituted nearly 52% of the total outward remittances under the LRS, which officials believed was being misused. But finding tax avoiders with TCS on credit cards is like digging with a needle. Instead, tax experts believe the simplest way to track forex transactions is to levy a nominal tax. Likewise, simply reducing the LRS limit from the current $250,000 a year would help limit the forex outgo and boost domestic travel.
Lastly, TCS collections must be eventually returned to taxpayers, which means not only the government incurs needless and avoidable administrative costs, but taxpayers will also lose out on the interest on savings. Regardless of the intent, the move had no takers either on the right or left and was vehemently opposed by both critics and proponents of the government. Officials must avoid policies that use a sledgehammer to crack a nut.