Urgent need to reform the taxation system

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- Decisions are announced in the budget without proper review in the government? Tax deduction at source rates were also to be increased from 5 per cent to 20 per cent in both cases of remittances and purchase of foreign tour packages under LRS.

Some time ago the government announced another change in tax deduction at source regime in case of liberalized remittance scheme and foreign tour packages. This is the third major change in this sector after February 2023. The first change was announced on 1 February 2023 when the budget for 2023-24 was presented. Accordingly, TCS activation on overseas remittance under LRS Rs. 7 lakh limit was to be abolished from July 1, 2023. In other words, tax deduction at source was to be applicable on all liberalized remittance scheme remittances. Tax deduction at source rates were also to be increased from 5 per cent to 20 per cent in both cases of remittances and purchase of foreign tour packages under LRS.

Three and a half months later, the finance ministry tightened the tax deduction at source regime under the liberalized remittance scheme. It amended the current account transaction rules on May 16 to bridge the gap between credit card and other modes of transactions under the liberalized remittance scheme. This effectively means that credit card payments for foreign currency bill payments will also come under the Liberalized Remittance Scheme norms. Therefore, with effect from July 1, 2023, tax deduction at source will also be levied on it at the rate of 20 percent.

The third change was announced on June 28. According to the government, it is based on the comments and suggestions received regarding the budget and the decisions announced on May 16. Effectively, the third change was actually a reversal of earlier decisions. According to this decision, the TCS rate on all types of remittances related to LRS and foreign tours has been reduced to Rs 7 lakh per person per person. During this time mode of payment did not matter. But Rs. Above the limit of Rs 7 lakh, remittances made for repayment of education loans will be subject to tax deduction at source at the rate of 0.5 per cent, TCS at the rate of 5 per cent for education or medical remittances and 20 per cent for the remaining remittances, it said. The new rates will be applicable 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 liberalized remittance scheme, thereby removing the 20 percent tax deduction at source levied on them. In other words, credit card transactions abroad were excluded from the liberalized remittance scheme. It may be noted that these decisions, which were later withdrawn, were announced in the budget or in a post-budget follow-up. Budget decisions are generally announced without proper review within the government. In many cases, finance ministry representatives also quietly discuss the implications of the proposal with some stakeholders and only then include it in the budget.

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