Are you getting the best out of digitization?

By Madan Sabnavis

The idea of ​​having tax collection at source (TCS) on credit card payments raises some finer points about the country’s remittance policies, as well as the effective use of technology. For one thing, foreign-use credit card payments should always have been covered by the Liberalized Remittance Scheme, as there was no reason to exclude them from its scope. But the concept of tax collection at source (which started for spending over `7 lakh per year) raises some questions about the robustness of our systems. Does this mean that the digitization effort has not completely helped somewhere?

It’s worth remembering that the nation went through the pain of an unsuccessful demonetization – one that failed to expose the existence of significant black money or counterfeit currency. The justification put forward was that the move promoted digitization, creating an audit trail. If the effort to migrate payments to cards, wire transfers, e-wallets, etc. was part of the strategy, it questions the need for TCS.

The reason given is that there have been instances of people taking advantage of the LRS likely spending more than the $250,000 allowed without having enough income. The issue of money laundering has come up as some people are believed to be using such funds for illicit purposes. But since all dollar payments through any route from bank transfers to cards go through the banking system, there is knowledge of forex’s major lenders. Expenses in excess of `10 lakh per year, even for domestic purchases made with credit cards, are already reported to the tax authorities. Therefore, similar reporting could have been done for forex spending.

Basically one pays tax on the service component when forex is purchased in any form. TCS is not really a cost to the user as it can be claimed as a refund when filing returns. Thus, it is not a source of revenue for the government as all taxes collected would be returned. This new rule creates a major operational problem for banks that manage customer accounts. For example, if payments are being made for education, they should find out if the charges are for fees or entry fees. For bank transfers, the customer must specify the purpose. But this does not happen with card payments when the merchant swipes the card. Often the supplier’s machine will display a different name than the target. Likewise, taxpayers will have to make sure the bank doesn’t slip or they could be held liable for evading this tax.

There is little reason to have TCS for forex as every trade goes through the audit trail. With simple algorithms, banks can inform the tax authorities who the big spenders are. Total annual payments under LRS are approximately $20-25 billion, of which 15% is for taking care of family members, 25% for studies, and 35% for travel. The amount involved can be significant, aside from the inconvenience of paying the tax and recovering the tax. Assuming about 60% of the $25 billion qualifies for a 20% TCS, this would mean about $1.2 trillion, of which 20% would be collected as withholding tax. The `24,000 crore in tax means lost interest of about `1,500 crore to the taxpayer. In addition, waiting for refunds would cause significant inconvenience to taxpayers.

The problem with fully committing to digitization is that the loose ends are not tied up. For example, Aadhaar helps to better target beneficiaries. But that’s where the link ends. One uses the passport to get the Aadhasr card, and when the passport is due for renewal, one has to show the Aadhaar, which implies a circle. The process should ideally be seamless and automatic for the issuance of passports when all information is already with the government.

While the country works to “facilitate business,” such laws make it difficult for players. In fact, it is also time we moved away from the legal TDS concept, which today stands at 10%. With technology rife in the financial industry, clients should be asked in advance to declare the tax bracket they fall in so that appropriate deductions can be made.

Nowadays, there is a Form 15H that must be completed if not liable for paying taxes, which can get messy as different banks have their dates for accepting such returns. Currently, it is difficult for individuals to keep track of all interest and dividend payments received during the year in order to pay the required input tax. Deficits attract penalty interest. Specifying the tax bracket in advance and letting the company/bank withhold the full tax would make it easier to manage finances.

The country should make better use of technology to improve the ‘ease of life’. There is a tendency to create systems with enthusiasm. However, completing the loop has always been a challenge leading to duplication and unnecessary interventions. There may be a reason to withdraw the TCS concept in this regard.

(Madan Sabnavis Chief Economist, Bank of Baroda. Opinions are personal)

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