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Budget 2023 Series #2 – Tax collection at source for overseas tours and remittances

“Kahin pe nigaahein, kahin pe nishaana”

Today, we look at one of the most controversial proposed amendments in Budget 2023.

Currently, section 206C(1G) of the Income-tax Act, 1961 provides TCS provisions at –

– 5% for any overseas tour packages

– 5% for any foreign remittances under Liberalised Remittance Scheme (LRS) above Rs 7 lakhs per year in aggregate

TCS functions in a way that the receiver of income adds the specified percentage (5% in our case) to the invoice value and deposits it with the Government.

So, any one buying a foreign tour worth Rs 10 lakh for their family would have to effectively pay Rs 10.5 lakhs (Rs 10 lakh + 5%). The credit for this Rs 50,000 can be claimed while filing the income tax return.

Now, Budget 2023 proposes to revise these limits to-

– 20% for overseas tour packages

– 20% for LRS remittances without any threshold limit (except for medical and educational purposes)

These are highly controversial just due to the sheer magnitude of the change.

Let’s break them down individually –

LRS remittances

Under Foreign Exchange Management Act, 1999, an Indian resident can remit amounts overseas upto USD 2,50,000 per year (approx. INR 2 crores) without approval of the RBI.

Remittances under LRS are made for various purposes like foreign education, medical treatments, investments in foreign real estate or foreign stocks, transferring money to relatives etc

The Income-tax law is already levying TCS of 5% on remittances above INR 7 lakh.

By increasing the rate from 5% to 20%, the Government is deviating from the intention of these TCS provisions.

The reason for introduction of TCS on these transactions was that the Income tax Department could monitor and track the foreign remittances.

Fair enough.

The intention was never to block the money involved in such remittances.

But now, the intention seems to have moved away from “tracking” and is now to “redirecting” funds into India itself.

But this will have far reaching negative consequences as well

For instance, if Mr. Nirmal is sending Rs 10 lakh for living expenses to his daughter Ms. Sitha who is studying abroad. He would now have to remit Rs 12 lakh for this!

Increasing rate of TCS on LRS remittances is surely a weird way of saying “Invest in India”.

Overseas tour packages

The Government brought the earlier TCS of 5% for dual reasons –

1. Collect data of individuals going on foreign trips (one can argue that linking passport with PAN would have been an easier route)

2. Discourage foreign tourism by blocking 5% of TCS (thereby promoting domestic tourism)

While the first objective was fulfilled, the second objective could not be fulfilled.

The number of Indians flocking abroad has skyrocketed, especially in the aftermath of Covid lockdowns.

So, what was the only route to promote domestic tourism?

No, it was not to develop better infrastructure or provide incentives to develop the tourism industry!

Instead, it is to put a larger dent in the pockets of the middle class looking for a luxurious vacation.

To put it in numbers in terms of the above example, anyone paying Rs 10.5 lakhs for a foreign tour would now have to pay Rs 12 lakhs for the same package.

This is aimed to promote domestic tourism instead of going on foreign tours.

Let’s put this into perspective –

I went on a solo trip to Kedarnath last year. While it was thoroughly enjoyable due to the sheer divinity in the place, I would not recommend anyone to visit Uttarakhand on a solo trip.

The infrastructure is really poor and in the name of tourism, people are trying to loot every penny from tourists.

I was blessed to have met locals in Uttarakhand who guided me correctly and saved me from being overcharged or misdirected. But everyone may not be this lucky.

There is no security or regulation to control the miscreants and the law enforcement is usually hand in glove with them.

And I am Indian; I can only imagine what poor foreign tourists would be going through.

Forget attracting foreign tourists, the current status of our tourism infrastructure is in shambles.

I do not mean to sound negative or condemn the beauty of India.

I have been to the Swiss as well and can say with pride that the views in Kashmir and Uttarakhand are no less.

But a good view and climate is not the driving force for tourism development.

For tourism to flourish, the Government should focus on building a better infrastructure rather than making foreign travel more expensive.

So, when the Government is proposing the said amendment in TCS regulations, the rich businessmen would not mind this much – they would pay lesser advance taxes instead.

But the salaried middle class will stand to lose the most.

The Government is literally holding a gun to their head – either shell out more money or “enjoy” your vacations in India (at your own risk).

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Stay tuned for such insight in our Budget 2023 Series! The author can be reached at vijay@vprpca.com.

“Shiny optics, disturbing reality”

Everyone is talking about the biggest amendments proposed by Budget 2023 in relation to personal income tax.

But we need to read between the lines to see a disturbing reality.

Let us see how –

– We now know that the Government of India is promoting a shift from old tax regime to new tax regime.

– One of the salient features of new tax regime is that most deductions and exemptions available under Income tax law are not available in the new regime.

– This has potentially far-reaching consequences which are not easily recognisable.

To understand the consequences, let us first see the logic behind deductions and exemptions.

Let us take a step back into the basics of the functions of a Government.

– Every civilised society is bound to protect and provide a healthy lifestyle to all its citizens. For this purpose, the Government levies and collects taxes.

If you see most European nations, they have high tax rates but provide highly subsidised free healthcare and education for its citizens.

– This concept is popularly called “social security”.

– But the case of India is different. The Government, despite based on socialist principles, is unable to provide social security for its citizens directly.

– There are various reasons behind this – huge population, lack of infrastructure, problems in distribution methods, instability in Governments and policies etc

– So, in order to compensate for this lack of social security measures, the Government of India provides certain exemptions and rebates under Income tax law.

– Let us take the example of Section 80C deductions. Most of the deductions are allowed to promote a healthy lifestyle amongst the Indian populace – for example, deductions for life insurance policies, fixed deposits, housing, provident funds etc are designed to promote a habit of savings and stability, better quality of life amongst Indians.

– The Government is unable to provide social security for its citizens and hence, indirectly provides it through various deductions and exemptions in tax law.

Now, coming back to the shift in tax regime –

Since the Government is promoting the new tax regime which does not allow deductions and exemptions, this also means that the Government is indirectly reducing social security for its citizens.

The healthy habits which we have inherited from our parents (invest in provident fund, insurance, deposits, housing etc) are all being subtly reversed.

PPF is one great example (and I personally use it as well) – It is an EEE instrument i.e. the investment in PPF is exempted, the income from PPF is exempted and maturity proceeds are tax exempt too.

Even though forced, the PPF would give good returns. Today, it gives 7.1% interest rate which is tax free – certainly advantageous for an individual!

But with phasing out section 80C deductions, there is a huge chance that people will stop investing and saving.

The reason? There are many but one biggest reason at the macro-economic level is that the Government wants to promote spending of money.

So if Mrs Sheetal was incentivised to invest Rs 2 lakh a year to save taxes, if you take that incentive away, will she still invest Rs 2 lakh?

In an ideal world where everyone is financially disciplined, that would be true. But we do not live in an ideal world.

We live in a world where luxury is being made more affordable and savings are drastically reducing.

It is easier than ever to spend on luxury items.

Add more usable income in the hands of individuals, we can be sure that they would not be saved in “boring” fixed deposits or “boring” life insurance policies.

It will be used to satisfy momentary urge of online shopping or a down payment on that Mercedes.

YOLO, right!?

What benefit does the Government get from this?

If a common man spends more, that would lead to increase in the consumption in the economy.

An increased consumption would mean an increased GDP and growth rate.

All of which ties up with $5 trillion economy dream.

So, India will progress, right? What’s the harm, you may ask?

But the real question we need to ask – Progress will be at what cost?!

We have seen this exact model in developed countries like the United States.

People are hooked to consumption. They have no habit of savings within them.

(On a side note, in the US there is a mandatory 401(k) investment which promotes savings. The comparable provident fund in India is not mandatory for employees making more than Rs 15,000 a month)

But when there is high consumption, the economy grows at a sharp pace but individual savings are low.

This makes the country vulnerable to the bad effects of economic crises.

What was the reason that the economic crisis like those of 2008 hardly affected India?

Economists say that it is the strong savings culture – we traditionally spend less than we make. So, when the global economic growth slowed down, no one was left out on the street.

One can argue that this is one of the biggest reasons why India has been relatively immune to the ongoing 2023 recessionary crisis as well.

Let’s face it – market downturns happen. It is the economic cycle and no one can stop it.

But if we take away those savings, we are leaving India susceptible to huge recessions.

If unchecked, this new tax regime can be a silent killer of the fundamental principles of the Indian society.

Maybe not in 2 years or even 5 years, but 10 years from now – the effects of this “consumption culture” will be felt. And it will not be pretty.

Who is the biggest loser?

The biggest loser from this entire fiasco is definitely the middle class.

In case of an economic recession and people are living paycheck to paycheck, who will be hit by a sudden increase in prices and a simultaneous economic slowdown?

Listen, the rich have enough to fend for themselves in a rainy day (or year), and the poor will definitely be bailed out by the Government through populist schemes.

It is the middle class which will be left hanging and depressed, like always.

The new Income tax regime, which is marketed as a saviour for the salaried middle class, can become the reason why the middle class will become susceptible to economic recessions!

Oh, the irony!

What is the way forward?

In any civilised society, the Government cannot force its citizens to live in a good way. Instead, a good living has to be incentivised and promoted through various means or schemes.

What the Government needs to do is promote social security in some form or the other. The best and ideal way is by giving tax breaks (which is currently the case). In case the Government wants to stop giving tax breaks, the best incentive is to develop a scheme for the middle class where the Government will fund a certain portion of the savings or investments.

However, for any of this to happen, the lawmakers have to look at the repercussions of their actions in the future.

The first step lies in recognising the danger of removing incentives to save. The remedies will follow!

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Stay tuned for such insight in our Budget 2023 Series! The author can be reached at vijay@vprpca.com.

It is common knowledge now that the compliances under Companies Act, 2013 are tiresome. They are only getting stricter.

In this light, it does not make sense that the compliances applicable to Reliance Industries Ltd are same for compliances of Chotu and Motu Pvt. Ltd.

The Government had introduced the concept of “small company” under section 2(85) of the Companies Act, 2013.

W.e.f 15 September 2022, the criteria has been amended to include a company which has

– Paid up share capital of upto Rs 4 crores;

– Turnover of Rs 40 crores

Benefits / exemptions for small company

1. Board Meetings:

Small companies doesn’t have a wide range of business so it’s not required for small companies to hold 4 board meetings in year, small companies may hold only 2 board meetings in a calendar year, i.e. one Board Meeting in each half of the calendar year with a minimum gap of 90 days between the two meetings.

2. Rotation of company auditors:

It is not necessary for small companies to follow the condition laid in Section 139(2) of the Companies Act 2013, which mandates the rotation of auditors every 5 years (individual auditors) and every 10 years (firm of auditors).

3. Exemptions for Board’s Report:

Matters to be included in Board’s Report mentioned in Rule 8 of Companies (Accounts) Rules, 2014 do not apply for small company.

4. Annual Return:

Annual Return of a Small Company can be signed by the company secretary alone, or where there is no company secretary, by a single director of the company.

5. Remuneration details in Annual Return :

As per section 92 of Companies Act, 2013 private companies are require to give a details of remuneration of directors and key managerial personnel , but in small companies only “aggregate amount of remuneration drawn by directors” is required in annual return.

6. Cash Flow Statement:

A small company needs not to include Cash Flow Statement as part of its financial statement.

7. Exemptions for Audit Report:

Small companies are not required to give report on internal financial controls with reference to financial statements and the operating effectiveness of such controls in audit report.

8. Lesser penalties for Small Companies under Section 446B of the Companies Act, 2013:

If a small company fails to comply with the provisions of section 92(5), section 117(2) or section 137(3), such company and officer in default of such company shall be liable to a penalty of upto 50% of the penalty specified in such sections.

As we can see, a small company has various concessions granted to it. Many SMEs will get covered in the new definition of small company.

It is important for companies to assess and avail the benefit of lesser compliances of a small company.

Thank you for reading.

We would love to hear from you. Please write to us at contact@vprpca.com

Introduction

Overseas investments by Alternative Investment Funds (“AIFs”) and Venture Capital Funds (“VCFs”) are governed by the guidelines prescribed by the Securities and Exchange Board of India (“SEBI”) from time to time.

While prior approval of the Reserve Bank of India (“RBI”) is not needed for overseas investments, the prior approval of SEBI is required for allocation of limits for overseas investment to an AIF/VCF.

The current overall investment limit for overseas investments by AIFs and VCFs is USD 1.5 billion, and these limits are allocated on a first cum first serve basis subject to a cap of 25% of the investible funds of a scheme of an AIF/VCF.

An AIF/VCF is required to make investments in offshore entities within 6 (six) months from the date of SEBI granting its approval.

SEBI recently issued the guidelines for overseas investment by AIFs and VCFs (“New Guidelines”) on August 17, 2022, which sets out a revised framework for making overseas investments by AIFs and VCFs.

Prior to the issuance of the New Guidelines, and subject to other prescribed restrictions, AIFs and VCFs which were desirous of investing in offshore investee companies were permitted to make investments in such offshore entities which had an ‘Indian connection’ (i.e., the offshore companies which had back-office operations in India).

With the New Guidelines now in effect, such pooled investment vehicles are no longer restricted by the “India connection” requirement in relation to their offshore investments.

The New Guidelines are in addition to the earlier guidelines issued by SEBI on this subject matter (except to the extent modified by the New Guidelines).

The New Guidelines

1. Eligibility criteria for overseas investee company: As per the New Guidelines, AIFs and VCFs can invest in offshore companies which:

are entities incorporated in countries whose securities market regulator is a signatory to the International Organization of Securities Commissions’ multilateral memorandum of understanding (Appendix A Signatories) or a signatory to the bilateral memorandum of understanding with SEBI; and

are not identified by the Financial Action Task Force (“FATF”) in a public statement as: (i) a jurisdiction having a strategic anti- money laundering or combating the financing of terrorism deficiencies to which counter measures apply, or (ii) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with FATF to address the deficiencies.

2. Revised application format: The New Guidelines have introduced a more detailed format for AIFs and VCFs applying to SEBI for allocation of overseas investment limits. The revised format requires the AIFs and VCFs to provide inter alia details of the overseas offshore entity, type of investments contemplated, and overseas investments made by the relevant AIF or VCF in the past.

3. Undertakings from the AIF/VCF: Further, unlike the previous format, the revised format prescribes for additional undertakings to be provided by the trustees/designated partners/board of directors of the applicant AIF and VCF relating to: (a) the bona fide nature of the proposed overseas investment, (b) the investment being consistent with the fund’s investment objectives, and (c) compliance of the proposed overseas investment with the regulatory framework for overseas investment by AIFs/VCFs.

4. Undertaking from the manager of the applicant AIF/VCF: A detailed undertaking is also required to be submitted by the manager of the applicant AIF/VCF in relation to inter alia the following:

exercise of due diligence by the manager;

nature of proposed instrument, which should be an equity or equity linked instrument;

the proposed offshore investee company being an offshore venture capital undertaking;

the proposed offshore investee entity complying with the eligibility criteria prescribed under the New Guidelines;

the AIF/VCF not investing in joint ventures or wholly owned subsidiaries while making overseas investments;

adherence to FEMA regulations and other guidelines of the RBI in relation to a structure which involves foreign direct investment under the overseas direct investment route;

compliance with all requirements under RBI guidelines on opening of branches/subsidiaries/joint venture/undertaking investment abroad by non-banking financial companies (“NBFCs”), where more than 50% of the funds of the AIF/VCF has been contributed by a single NBFC; and

the transferee entity to which the AIF/VCF sells/transfers its invested offshore stake, is an entity that is eligible to make overseas investments in accordance with the Indian foreign exchange laws.

5. Re-investment of sale proceeds: The New Guidelines also clarify that sale proceeds received by an AIF or VCF from liquidation of its offshore investee companies would be available for re-investment.

6. Reporting of sale/divestment:

The New Guidelines have introduced the requirement to report to SEBI of any sale/disinvestment by AIFs or VCFs. Accordingly, SEBI has prescribed a format for reporting any sale/disinvestment by AIFs or VCFs. Such reporting is required to be made by the relevant AIF or VCF within 3 (three) working days of the disinvestment by emailing the report to aifreporting@sebi.gov.in.

Further, SEBI has prescribed a one-time reporting to be made by all AIFs and VCFs of their previous sales/disinvestment in offshore entities till date by September 16, 2022, by emailing the report to aifreporting@sebi.gov.in.

Our comments

The New Guidelines have certainly liberalised the previous regime which permitted AIFs and VCFs to only invest in overseas companies that had an ‘Indian connection’. The liberalisation is coupled with additional safeguards and investment conditions which have been introduced for AIFs and VCFs keen on investing offshore.

SEBI has also reinforced its intention of increasing accountability of the governing bodies and managers of AIFs and VCFs participating in offshore investments as it has sought additional undertakings from them at the time of making an application for seeking limits for overseas investments.

We would love to hear from you. Please write to us at contact@vprpca.com

Let us try to break down Form 15G and Form 15H in simple terms!

What?

Form 15G or 15H are self-declaration forms that state that one’s income is below the taxable limit and hence exempt from tax.

One can avoid the TDS on incomes like interest and rent by submitting form 15G or 15H to the relevant person or organisation like banks, issuers of corporate bonds, post office or tenant.

Applicability

Form 15G is for resident Indians under the age of 60, HUF or trust. Form 15H is for resident Indians aged 60 years or above.

Why?

Say, you are earning interest income from banks exceeding Rs 10,000 a year. So, banks are obligated to withhold a certain amount of TDS.

But if your total income in the year is less than the taxable amount, you will have to file your tax return and claim a refund of that TDS.

So the TDS was withheld for nothing!

Instead, if the amount is significant (usually for senior citizens), it is better to submit the Form 15H with your bank to avoid withholding of TDS.

How to fill?

Step 1: Fill the forms (online or offline, depending on the deductor)

Step 2: Attach copy of PAN card

Step 3: Submit the forms

It is this easy! The forms are available online on the website of the Income tax Department.

When to submit?

Validity of 15G and 15H is one year only and needs to be submitted every financial year.

What happens if you don’t submit?

The only way to seek a refund of excess TDS deducted because of delay or non-submission of form 15G/15H is by filing income tax return.

Thank you for reading. In case of any clarification, please write to us at contact@vprpca.com