Tax trauma in Covid crisis

Amid Covid crisis, the government has engaged itself in multiple issues, all at once, which otherwise could have been sidelined for the moment. In the first instance, the pandemic is refusing to die down and everyone is clueless about the scenario as and when the virus is neutralized. Meantime, the virus continues to sweep health as well as economic fortunes of populations irrespective their locations and status. Notably, the kind of economic catastrophe it has unleashed and still continues to devastate the whole economic sphere, has been breeding unprecedented miseries to the people, making them poor, even poorer.

As I have already mentioned in my previous columns, the pandemic has devastated the mental ability of people where stress is mounting on the populations at dangerous levels. Precisely, mental health at mass level is deteriorating fast, mostly because of the economic losses which this deadly virus has triggered by inciting health emergency of first of its kind in the human history in a century.

There are many actions of the government which didn’t match the suitability of the Covid-induced crisis, but such actions not only complicated its fight against the virus, but it also added more to the economic woes of common people.

Announcing tax collection at source (TCS) on foreign remittances from October 1, 2020 doesn’t fit in the scheme of things where the Covid infection continues to put peoples’ lives at stake and simultaneously pushing economy into deep slump. It’s worth mentioning that one will have to pay tax collected at source for spends on foreign studies, travel or investments, however one will be able to adjust it with his tax liability later. Precisely, the upfront cost of studying abroad, taking a holiday in a foreign country or investing in stocks, bonds and property abroad is set to go up from October 2020. It’s noteworthy, the TCS of 5% is to be imposed on all Liberalised Remittances Scheme (LRS) transactions above Rs 7 lakh including travel overseas. For education-related foreign remittances funded by loans, though, the tax will be just 0.5% for amount above Rs 7 lakh, but will go up to 5% if PAN is not provided.

Notably, this new income tax rule was supposed to be effective from April 1, 2020. But with the outbreak of coronavirus pandemic, it was extended till October 1, 2020. and also amended. The most surprising part is that the implementation of TCS was deferred when outbreak of coronavirus pandemic was on a very low scale. Now, when the infection is spreading fast and has already come close to 50 lakh souls across the country, the imposition on TCS doesn’t sound in the fitness of things.

According to the RBI guidelines, under Liberalised Remittances Scheme, an individual is allowed to remit up to 2.5 lakh dollars in a financial year, equivalent to about Rs 1,85,00,000 (Rs 1.85 crore), at an exchange rate of Rs 74. Such remittances could be for meeting expenses such as medical or education abroad or even for investing in the stock markets.

As per the reports quoting the opinion of tax experts, the rationale behind the introduction of TCS is that the income tax department has made several observations that the amount sent by the persons outside India does not get corroborated with their income tax returns. It’s believed that TCS will plug undue tax leakage and failure to disclose such information by persons.

Without getting into the political dimensions of the debate of TCS implementation, let’s have a look about the exact nature of this tax and its impact. Simply put, tax collected at source (TCS) at the rate of five per cent will be imposed on the money remitted outside India. However, if the remittance is made out of a loan taken for higher education, the TCS rate will be 0.5 per cent of the money remitted.

The remittances on which TCS will apply are those where money is sent outside under the LRS of the RBI or buying tour packages. Simply put, foreign remittance made above Rs 7 lakh will attract a tax-collected-at source (TCS) unless the tax has already been deducted at source (TDS) on that amount.

It’s to be kept in mind that the TCS will be applicable on the amount in excess of Rs 7 lakh in a financial year and not on the total amount. A tax expert, who is an acquaintance was kind enough to make it easy for us to understand the working of this new tax. If the total foreign exchange facility availed under LRS in a financial year is Rs 10 lakh, and one wants to remit the amount abroad, a TCS at 5 per cent will be applicable on Rs 3 lakh. (Rs 10 lakh minus Rs 7 lakh) and tax collected will be Rs 15,000.

Notably, under the LRS all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both.

One can avail foreign exchange facility for studies abroad, travel for business, or attending a conference or specialised training or for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up. One can also avail the facility to make donations. Private visits to any country (except Nepal and Bhutan), going abroad for employment, expenses in connection with medical treatment abroad etc. also are covered under the scheme.  However, LRS does not allow buying and selling of foreign exchange abroad, or purchase of lottery tickets or sweepstakes, proscribed magazines and so on.

Meanwhile, TCS impact on students who pursue education in a foreign country or are intending to go abroad for studies merits a mention. The imposition of this tax will hit the plans of students who are either planning to study abroad or are already studying in the universities and schools in foreign countries. Besides, it will not only make the entire remittance exercise complicated, it will also increase the transaction cost for the one who is remitting funds overseas to a university or a college. Many would be discouraged not to look at the option of pursuing education abroad in a foreign institution.

Statistically speaking, of the total of $11.34 billion remitted by Indians overseas in fiscal 2019 under the LRS, about $3.5 billion to foreign countries for education was remitted under the scheme in the fiscal 2019.

Here,PC Mody, Chairman of the CBDT, is worth quoting as he said the TCS for remittances including education was introduced after some study was made and the government came across cases where the return profile of remitter did not match with the remitter made. “So it is just a question of cataloguing the remittances and matching returns. The remitter is not paying a second tax but gets credit on that. Education is one of the purpose for which remittance is being made. We are making a distinction on the threshold of remittance made and not the purpose of remittances being made. Remitter is getting a credit in any way. The person who I making remittance, that deduction is being made goes to his account, he gets credit back,” he said.

However, it’s a fact that the fees are directly remitted to the accounts of college/universities in a foreign country and there is no question of any illegal activity. TCS has simply made the process complex by increasing paperwork. Of course, there may be many who have been transferring funds abroad and did not file income tax returns. People remitting large sums ideally should be in the income tax bracket and paying income tax. There are also some segments that apparently have no business to fall in the TCS trap and don’t file income tax return, but they could be heading for a fancy tour at regular intervals with the whole family. This new tax is going to net this segment and make them pay if their remittance is in excess of specified limit. But, it would have been in the fitness of things to exclude students from this tax net and at the same time deferred its implementation till pandemic gets under control.

(Inputs from tax experts are acknowledged. The views are of the author & not the institution he works for)