In her Budget speech, the Finance Minister indicated that the goal of ‘Amrit Kaal’ is for India and its citizens to ascend to new heights of prosperity, as the country complete 100 years of independence. Budget 2023 has drawn the blueprint for India’s ‘Amrit Kaal’ and has a vision for an empowered and inclusive economy, where there is transformative focus on economic empowerment of women, assistance package for artisans, green growth, and development of tourism.
The travel and tourism sector across the globe suffered a severe setback during the pandemic and there is a need to resurrect this sector and develop India as a tourist destination, given that it offers noteworthy experiences. The government is planning to take concrete steps to build India’s tourism sector, as was evident from the Finance Minister’s speech.
Domestic and inbound tourism in India has potential which is yet to be tapped. This also offers job opportunities and entrepreneurship for youth. The proposal to launch select 50 destinations across India has raised the hopes for the domestic tourism industry. Improved infrastructure, easy connectivity and development of a world-class tourism experience will give an impetus. It will also enable grassroot level changes in delivering a true “Atitihi Devo Bhava” experience in welcoming incoming tourists. Additionally, active participation of states and public-private partnerships (PPPs) through various schemes will nurture domestic tourism.
While on one hand, the travel and tourism sector welcomed the Finance Minister’s vision for the growth of domestic and inbound tourism, this buoyant sentiment was dampened by the increase in rates of tax collection at source for outbound tour packages.
TCS, as a concept was introduced and made part of the tax provisions in 1988. The objective of introducing TCS was to enable tax collection at its very source, especially in cases where there was fear of tax returns not being filed by end users of purchasers of goods and services. For many years, the scope was limited to unregulated sectors such as scrap sales, alcohol, forest produce etc. The underlying mechanism of collecting tax at sources is similar to the mechanism followed in indirect taxes. This eases collection of taxes, tracking of transactions and gathering of information. Time and again, TCS provisions have been used for widening and deepening of the tax base such that evaders can be tracked to file their tax returns.
Amidst the government’s claims to reduce tax rates, the Finance Bill 2023 has proposed to stretch its reach, to increase TCS rates on foreign spending in an attempt to increase collections and improve compliance. TCS, in case of foreign remittances, has been increased to 20%, which is quadrupled from its original rate of 5%.
Foreign remittance by residents is governed by the Reserve Bank of India (RBI)’s Liberalized Remittance Scheme (LRS) as per the Foreign Exchange Management Act, 1999 (FEMA). The LRS, inter alia, covers current account remittances in the nature of medical expenses, education, gift, and overseas tours and any other need, except for some prescribed spending.
Presently, TCS is collected at the rate of 5% on any foreign remittance in excess of INR 7 lakhs, under the LRS scheme, except for cases where remittance is towards education out of specified loans. Besides, payment for overseas tour program packages are under the ambit of TCS at the rate of 5% without any threshold. Through TCS provisions, the government has also tried to make non-PAN holders as well as non ITR filers, tax compliant by providing for higher rate of tax collection.
It is proposed that the AD bank / tour sellers should collect TCS at 20% of LRS remittance / sale of overseas tour package respectively. The amended provisions are proposed to be brought into effect from 1 July 2023.
The threshold of INR 7 lakhs for LRS is proposed to be done away with. Mercifully, slashed rates continue to be provided for the following LRS remittances in excess of INR 7 lakhs:
– For education out of loan taken from specified financial institution – 0.5%;
– For education (not out of specified loans) – 5%;
– For medical treatment – 5%.
While the proposed amendment is targeted to increase compliance among high income individuals remitting money abroad while disclosing meagre income in the return of income, it may lead to unnecessary compliance for genuine cases, senior and super senior citizens. While the introduction of TCS could be justified in the past as tourism was always an unregulated sector, the increase in rate to 20% would lead to working capital being adversely affected.
This amendment will directly affect the business of tour operators. Some tour operators may not be able to bear the burden of 20% TCS. This will promote unregulated economy and sale of piecemeal bookings will be encouraged instead of composite tour packages. Also, while there is no recourse to the taxpayers in making foreign remittances, foreign tours may be bought from non-residents who are outside the ambit of TCS provisions. It is possible that in order to circumvent aggressive TCS rate, the travel and tour sector companies selling packaged tour shall encourage MNCs to set up booking offices abroad, rather than in India.
Considering that the current draft proposals would raise many concerns, the Finance Ministry may need to relook at some of the provisions to make them succeed. Some relief that need to be provided are:
1) Consider lower TCS rate to enable tourism companies to stay afloat;
2) Relief to senior citizens and taxpayers with taxable incomes below basic exemption limits under any of the tax regimes;
3) Mechanism for obtaining lower TCS certificate in genuine cases;
4) Revive basic threshold of INR 7 lakhs for LRS remittance along with purchase of foreign tours.
The provisions, their applicability and consequences for defaults are quite cumbersome to understand for a layman. The present proposals will lead to an increase in the compliance burden on AD banks and tour sellers, to ensure that duly compliance is being carried out.
The government seems to have brought in these proposals to ensure that, assessees who have capacity to incur foreign expenditure on tours and make foreign remittances pay their due share of taxes. In the past, there were reports of taxmen monitoring social media to observe cases of splurging on foreign tours and spending and requiring consequent tax compliance. Now, the onus to catch those spending and make them pay their legitimate share of taxes, has been shifted to the Revenue.
Mansi Mehta (Director), Miloni Mehta (Manager) and Tanay Nuwal (Assistant Manager) with Deloitte Haskins & Sells LLP