LRS tweak is ill-conceived - Hindustan Times

LRS tweak is ill-conceived

ByHT Editorial
May 18, 2023 09:39 PM IST

Levying tax at source on credit card spending abroad may raise compliance hassles and spur untraceable transactions. Reconsider it

The Union finance ministry’s decision to include international spending on credit cards within the $250,000 which an individual is allowed to remit abroad annually under the liberalised remittance scheme (LRS) is a bureaucratic, self-defeating and regressive move that threatens to undo the gains made in formalising transactions and easing compliance. It means individuals will have to bear the burden of 20% tax collected at source (TCS; duly refundable when returns are filed) for transactions in a foreign currency, irrespective of whether this is being done abroad, or from India. There have been clarifications since, both on record and off, but some of these merely add to the complexity. And the emphasis that only HNIs (high networth individuals) will be affected seems to suggest it is fine to do this to the rich (even the well-off, given that an increasing number of Indians are now travelling overseas), a sentiment out of place in 21st-century India. Because this money will eventually be returned on filing tax returns — credit card issuers and banks must be quailing at the paperwork involved — there will be no significant boost to the government’s revenues. It will add avoidable friction to compliance and make an otherwise straightforward process nightmarish.

LRS was reformist, allowing Indians to spend abroad up to a specified ceiling. (HT PHOTO) PREMIUM
LRS was reformist, allowing Indians to spend abroad up to a specified ceiling. (HT PHOTO)

LRS was reformist, allowing Indians to spend and invest abroad up to a specified ceiling. Using an increased TCS – this was the change made in Budget 2023 -- to plug a potential loophole of people not paying tax in India sending a lot of money abroad is one thing, and understandable; but reducing the LRS limit by clubbing international credit card transactions into it is another. It might have been easier for the government to go after those in breach, or simply reduce the LRS limit. Instituting a regime that will result in more compliance, paperwork, inevitably stymie both private spending and overseas travel, and reduce the amount Indians can invest overseas is not the way to go about it. The underlying thought process — that the best way to monitor something is to tax it — is also deeply worrying.

The new regime will affect individuals and businesses alike in an environment where many business expenses are done on personal credit cards, and then reimbursed. It emanates from a protectionist mindset that India has long shed, and is out of step with an otherwise vibrant economy. Not only will the change lead to more headaches for the citizen, it will likely reverse gains made in cashless transactions. Worse still, it may lead to a rise in untraceable transactions as people may opt for hawala routes again to avoid the hassle of paying the tax and then waiting for refunds. LRS was meant to promote trade and investment, check money laundering and facilitate seamless capital flows in and out of the country. It was a strong step towards convertibility. The change threatens to defeat these aims in a single stroke. It must be rolled back.

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