The rise of revenue department

Source: This post has been created based on the article “The rise of revenue department”, published in Business Standard on 12th July, 2023.

Syllabus topic: GS Paper 3 – Mobilization of resources and associated issues

News: The recent multiple changes made by the Indian government to the Tax Collection at Source (TCS) system depicts a troubling shift in the revenue department’s approach to tax initiatives.

Although India’s tax system needs a more transparency, minimized discretion, and improved ease for taxpayers, it seems revenue department is returning to pre-reform practices. It is imposing unfriendly tax laws.

What are the recent changes made to the taxation system by the government?

on February 1, government announced all Liberalised Remittance Scheme (LRS) remittances would be subject to the tax collection at source (TCS). TCS rate was increased from 5% to 20% for both LRS remittances and overseas tour packages.

On May, government announced removal of differential treatment for credit cards for international transactions. This meant that credit card payments for foreign exchange bills would also attract a 20% TCS.

The third change announced last month rolled back the changes. For all remittances under the LRS and overseas tour packages, the TCS rate became zero for amounts up to ₹7 lakh per individual per year. It also exempted overseas credit card transactions from the LRS.

What are the critical arguments against these moves?

TCS rate was initially justified as a means for the government to monitor transactions. However, Banking records could already provide a trail for the tax department to monitor for tax evasion.

It shows that revenue department has been experimenting with unfriendly tax initiatives.

It also indicates returning to old practices that had been reduced after the economic reforms of the 1990s. These reforms included significant cuts in import duties, reduction and rationalization of direct taxes, and the implementation of the goods and services tax (GST).

The changes to the TCS for LRS remittances suggest a return to pre-reform practices.