Tuesday’s notification that purchases made outside India using credit cards will now attract a tax collected at source of 20% proved so controversial, even die-hard supporters of the Bharatiya Janata Party criticised the decision.
According to the new procedure, which was to come into force in July, this additional amount collected as tax can eventually be claim a refund when the spender files their income tax returns. This means that expenses of a family holidaying abroad, for example, would have shoot up 20%, locking away the extra cash until they receive their refund.
However, at 7.11 pm on Friday, the government decided to modify its decision and said that tax would be withheld only if individuals used their credit or debit card abroad to spend more than Rs 7 lakhs a year. It said it was doing so “to avoid any procedural ambiguity”.
Only the previous day, the finance ministry had defended the changes on Thursday and declared that it did not intend to roll them back.
By then, the announcement had already created a storm. “The decision is beyond tax terrorism,” said Surjit Bhalla, a former member of Prime Minister Narendra Modi’s Economic Advisory Council, in a tweet.
TV Mohandas Pai, chairperson of Aarin Capital Partners and vocal supporter of the Modi government, described the decision as “very perverse”.
“For the last 10 years, Income Tax authorities have, possibly, been given more power to go after citizens than in the previous 10 years for various reasons,” Mohandas Pai wrote in The Indian Express. “There seems to be a line of thinking in the government that citizens aren’t honest taxpayers and there’s great tax evasion.”
However, in a sign of how strong the party’s support is among the small number of high-income Indians who would make purchases abroad, most critics have been careful to not blame Narendra Modi directly. Instead, turned their ire on the bureaucrats who framed the policy.
Economics of the decision
So far, using international credit cards for payments towards expenses during overseas travel was not included in the limit set under the Liberalised Remittance Scheme. Under this scheme, Indians can remit up to $250,000 per annum without the authorisation of the Reserve Bank of India. The Centre has said that its new decision is aimed at preventing this remittance cap from being circumvented by people using international credit cards.
Some observers have pointed out that the 20% tax collected at source on international credit card transactions would help the Centre collect additional working capital by giving itself an interest-free basis until it returned the money after returns are filed.
The new rule is expected to hurt Indians travelling abroad and those who buy securities overseas – especially high-income Indians that are considered a key element of the Bharatiya Janata Party’s support base.
“This would put more budgetary pressure on middle-class families aspiring to travel abroad for holidays,” Parijat Garg, a digital lending consultant, told Moneycontrol, using a popular misdefintion of “middle class” that often includes people who should be considered rich if measured by income and/or wealth.
Here is a sample of responses by social media users who otherwise are strong supporters of the BJP.
There are others such as Harsh Madhusudan, an investor and a BJP-leaning author, who did not attack the ruling party, but trained their guns at the bureaucracy. “This is classic Yes Minister move,” Madhusudan said.