Undo The Un-Liberalised Remittance Policy

Source: The post is based on the article “Undo The Un-Liberalised Remittance Policy” published in The Times of India on 22nd May 2023.

Syllabus: GS – 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Relevance: About the tax on international credit card transactions.

News: The Centre has amended rules under the Foreign Exchange Management Act (FEMA) to bring international credit card spending outside India under the Liberalised Remittance Scheme (LRS).

What is Liberalised Remittance Scheme (LRS)?

About Tax on international credit card transactions and its advantages

A 20% (presumptive) tax deducted at source will only be levied on credit and debit credit card purchases of non-medical and non-educational purchases of over ₹7 lakh per person per year.

Note: The LRS allows for each individual to send (spend) abroad ₹205 lahks ($250,000) per year.

What are the expert’s opinions about imposing Tax on international credit card transactions?

What are the concerns associated with the tax on international credit card transactions?

Revenue to government and loss to citizens: If one spends ₹1,000 on travel, then this expenditure is deemed income. The government collects ₹200 immediately as the presumptive tax on the person’s presumed income.

As per the fixed deposit rate of 7%, the government gained(₹200 x 0. 07 = ₹14) certain amount prior to the tax return. Indians spent close to ₹1. 1 lakh crore on foreign travel in 2022-23. For the extra 0. 7% tax, that is a revenue gain of ₹770 crore.

Not the only way to track individuals: Not help in The government said that the taxation of foreign travel expenses would help track individuals with “expenditures disproportionate to income”. But among the global leaders in fintech, the government already has the expenditure information on foreign card travel, from which they can compute and assess whether expenditures are disproportionate to income.

No need to save forex: India’s reserves to imports ratio is at around nine months of imports. This is among the top 5% of non-oil economies in the world. In other words, there is a zero case for a TDS policy on LRS for “saving” foreign exchange.

What should be done?

The LRS policy was first introduced in 2004 with the short-term goal of decreasing the pressure of exchange rate over-valuation by creating a demand for dollars, and the longer-term goal of capital account convertibility.

But the proposed amendment to LRS is an ultra-regressive policy change and is against India’s goals and ambitions as a society and the economy. So, the government should revert the modified LRS policy.