Are we getting the best from digitisation?

By Madan Sabnavis

The idea of having tax collection at source (TCS) on credit-card payments raises some finer points on the remittance policy of the country as well as the effective use of technology. To begin with, having credit-card payments for foreign use should have always been under the Liberalised Remittance Scheme as there was no justification for keeping them out of the ambit. But the concept of tax collection at source (which started for expenses over `7 lakh per annum) raises some questions on the robustness of our systems.  Does this mean that, somewhere, the digitisation effort has not quite helped the cause?

It is worth remembering  that the nation went through the agony of a not- too-successful demonetisation—one that didn’t reveal the existence of significant black money or counterfeit currency. The justification provided was the move promoted digitisation, creating an audit trail. If the effort to migrate payments to cards, bank transfers, e-wallets, etc, was part of the strategy, then it questions the need for TCS.

The rationale given is that there have been instances of people making use of the LRS to spend probably more than the $250,000 permitted without having adequate earnings. The issue of money laundering has come up as it is believed that some people may be using such funds for unauthorised purposes. But since all payments made in dollars through any route starting from bank transfers to cards are through the banking system, there is knowledge of the big spenders of forex. Spends of more than `10 lakh per annum on even domestic purchases using credit cards are already being reported to the tax authority. Hence, a similar reporting could have been done for forex spending.

In fact, one pays tax on the service component when forex is purchased in any form. TCS is not really a cost for the user as it can be claimed as a refund when filing returns. Hence, it is not a source of revenue for the government, as all the taxes collected would be given back. This new rule creates a major operational issue for banks handling the customer accounts. For instance, if payments are made for education, they would have to figure out whether the expense is for fees or boarding. When bank transfers are made, the customer has to mention the purpose. But this does not happen in case of card payment when the vendor swipes the card. Often, the vendor’s machine will show a different name from the purpose. Similarly, tax payers will have to ensure that that the bank does not slip up, or else they may be held liable for avoiding this tax.

There is little rationale for having TCS for forex as every transaction is going through the audit trail. Simple algorithms can enable banks to let the tax authority know who the big spenders are. Total remittance under LRS on an annual basis is around $20-25 billion, of which 15% is for looking after relatives, 25% for studies, and 35% for travel. The amount involved can be considerable, besides the inconvenience of paying the tax and claiming refunds. Assuming around 60% of the $25 billion qualifies for a 20% TCS, it would mean that around `1.2 trillion would be the amount involved, on which 20% would be collected as tax at source. The `24,000 crore of tax will mean foregone interest of around `1500 crore for the tax payers. Further, the wait for refunds would cause considerable discomfort for tax payers.

The problem with going full steam on digitisation is that loose ends have not been tied up. Aadhaar, for example, helps target beneficiaries better. But the link ends there. One uses the passport to get Aadhasr card, and when the passport has to be renewed, one needs to show the Aadhaar, implying circularity. The process should ideally be seamless and automatic for issuing passports when all information already exists with the government.

As the country works towards ‘easing doing business’, such laws do make things tough for players. In fact, it is also time that we move away from the statutory TDS concept, which today is at 10%. With technology being widespread in the financial sector, customers should be asked upfront to specify the tax bracket they are in so that appropriate deductions are made. 

Today there is a form 15H that has to be filled if not liable for paying tax, which can get messy as different banks have their dates for accepting such declarations. Presently, it is onerous for individuals to keep track of all interest and dividend payments received throughout the year to be in a position to pay the requisite advance tax. Shortfalls attract a penal interest rate. By stating upfront the tax bracket and having the company/bank deducting the full tax, there would be greater ease in managing finances.

There is need for the country to make better use of technology to improve ‘ease of living’. There is a tendency to create systems with alacrity. However, completing the loop has always been a challenge leading to duplication and unnecessary interventions. There can be a case to withdraw the TCS concept in this regard.

(Madan Sabnavis Chief economist, Bank of Baroda. Views are personal)