As the deadline for filing income tax returns approaches, various aspects of tax law that require reform come under scrutiny. One such aspect is the provision of tax collected at source (TCS). Originally designed to mandate sellers to collect TCS on behalf of buyers and deposit it with the government, this rule has seen significant expansion in recent years, complicating the lives of even individual taxpayers.
The Evolution of TCS
Tax collected at source (TCS) was initially introduced as a mechanism to ensure tax compliance and to track transactions in specific industries. The primary aim was to prevent tax evasion by having the seller of certain goods or services collect tax at the point of sale and deposit it with the government. This tax collection method was initially limited to industries like alcoholic beverages, scrap, and minerals, where tax evasion was rampant.
However, over the years, the scope of TCS has widened. The Finance Act of 2020 expanded TCS provisions to include foreign remittances under the Liberalised Remittance Scheme (LRS) and the sale of overseas tour packages. This move was ostensibly aimed at curbing tax evasion and tracking high-value transactions. Yet, it has introduced significant complexities and burdens for ordinary taxpayers, making a strong case for revisiting and potentially abolishing TCS on foreign remittances.
Understanding the Impact of TCS on Foreign Remittances
Under the current regime, any individual remitting money abroad under the LRS is subject to TCS at the rate of 5% for amounts exceeding ₹7 lakh in a financial year. This provision was introduced with the intent of ensuring that individuals who send substantial amounts of money abroad are brought into the tax net. However, this has inadvertently affected a large number of individuals who make foreign remittances for legitimate reasons such as education, medical treatment, and family maintenance.
Case 1: Education
Consider a parent sending money abroad for their child’s education. Higher education in countries like the United States, the United Kingdom, and Australia is extremely expensive, often exceeding ₹7 lakh annually. The imposition of TCS means that these parents have to pay an additional 5% on the amount remitted, significantly increasing their financial burden. While this tax is refundable when filing income tax returns, the process is cumbersome and ties up funds that could otherwise be used for immediate educational expenses.
Case 2: Medical Treatment
Another scenario involves individuals remitting money for medical treatment abroad. Medical emergencies require quick and substantial financial outlays, and the added burden of TCS can be distressing. The process of claiming a refund adds to the stress of an already challenging situation, making the need for reform in this area even more pressing.
Case 3: Maintenance of Family
Many individuals remit money to support family members living abroad. This could include supporting elderly parents, siblings, or children. The imposition of TCS on these transactions adds an unnecessary financial strain on the taxpayer, especially when the remittance is for essential family support.
Administrative Burden and Refund Complications
The expansion of TCS provisions has also led to increased administrative burdens for both taxpayers and the government. Taxpayers need to maintain meticulous records of their remittances and ensure compliance with TCS provisions. For the government, the expanded scope of TCS means more transactions to track and process, which can strain administrative resources.
The process of claiming a refund for TCS paid is another area of concern. Taxpayers need to file for a refund when submitting their income tax returns, which can be a time-consuming and complex process. Delays in processing refunds mean that taxpayers’ funds are tied up for extended periods, impacting their cash flow and financial planning.
Questioning the Rationale Behind TCS on Foreign Remittances
The rationale behind imposing TCS on foreign remittances is to curb tax evasion and ensure that high-value transactions are reported. However, the effectiveness of this measure in achieving its intended goals is debatable. High-net-worth individuals (HNIs) and those intent on evading taxes can still find ways to circumvent these provisions, while ordinary taxpayers bear the brunt of the burden.
Moreover, the implementation of TCS on foreign remittances seems at odds with the government’s efforts to promote ease of doing business and simplify tax compliance. It creates an additional layer of complexity and inconvenience for taxpayers, which runs contrary to the objective of creating a taxpayer-friendly environment.
Proposing a Way Forward
Given the challenges and burdens imposed by TCS on foreign remittances, it is imperative to revisit this provision and consider abolishing it. Here are some suggestions for a more equitable and efficient tax system:
1. Enhanced Reporting Mechanisms
Rather than imposing TCS, the government can focus on enhancing reporting mechanisms for high-value foreign remittances. Financial institutions can be mandated to report these transactions directly to the tax authorities, ensuring transparency without burdening the taxpayer.
2. Threshold Revisions
If abolishing TCS is not feasible, revising the threshold for applicability can be considered. Increasing the threshold beyond ₹7 lakh can provide relief to many taxpayers who remit money for genuine and necessary purposes such as education and medical treatment.
3. Simplified Refund Process
Streamlining the refund process for TCS can mitigate the financial burden on taxpayers. A faster and more efficient refund system will ensure that taxpayers do not face liquidity issues and can access their funds promptly.
4. Awareness and Education
Increasing awareness and education about TCS provisions and the refund process can help taxpayers navigate the complexities more effectively. The government can invest in outreach programs to educate taxpayers about their rights and obligations, reducing confusion and non-compliance.
The imposition of TCS on foreign remittances, while well-intentioned, has created significant challenges and burdens for ordinary taxpayers. It is essential to recognize the legitimate needs of individuals who remit money abroad for education, medical treatment, and family support, and to create a tax system that is both fair and efficient.
Abolishing TCS on foreign remittances, or at the very least revising its provisions, will align with the broader goal of simplifying tax compliance and promoting ease of doing business. By adopting a more taxpayer-friendly approach, the government can ensure that the tax system supports rather than hinders the financial well-being of its citizens.
Disclaimer: The thoughts and opinions stated in this article are solely those of the author and do not necessarily reflect the views or positions of any entities represented and we recommend referring to more recent and reliable sources for up-to-date information.
