Editorial. The decisions on tax tweak on overseas spend and withdrawal of ₹2000 notes needed more clarity

Last week, the Centre and Reserve Bank of India (RBI), respectively, made two perplexing announcements. On May 19, the RBI said it would “withdraw the ₹2,000 denomination banknotes from circulation”. Three days before that, the Centre said that international credit card spends would attract a 20 per cent tax collection at source (TCS). Faced with a backlash, it hastened to clarify on May 19 that usage up to ₹7 lakh would be exempt.

There are two common aspects to these otherwise disparate moves. First, the objectives appear to be similar: to plug tax avoidance in one instance (remittances abroad) and outright evasion in the other (use of ₹2,000 notes). Second, the intent of these moves is unquestionable but the manner of execution leaves a lot to be desired. In both cases, it is cryptic, abrupt and does not appear to have been thought through carefully. Take the first. The RBI says that members of the public are “encouraged to deposit and/or exchange these banknotes on or before September 30, 2023”. On Sunday, the RBI clarified that the ₹2,000 banknote will “continue to maintain its legal status” even after that date. . The RBI says it is withdrawing the notes as part of its ‘clean note’ policy of clearing out currency that has been around for five years. There is apparently no cause for alarm; it accounts for less than 11 per cent of the value of currency in circulation, against 37 per cent in March 2018. Importantly, The ₹2,000 note is invisible in an everyday sense.

This suggests that the notes are unlikely to have been soiled. Therefore, the push to withdraw them implies that there is more than what meets the eye. Is the currency used for black money transactions, including elections, and is the move aimed at cleaning this up? There could be a rush to deposit these notes or devise ingenious ways to launder the money. IT sleuths would be on alert. This is all very well, but the shock to innocent people is an unintended consequence and could have been avoided with better execution.

Likewise, the TCSon overseas credit card spends is steep, at 20 per cent, and announced without considering the collateral damage on bona fide overseas expense. Prior to this year’s Budget, such remittances (which have for years been capped at $250,000) attracted a tax of 5 per cent, which has now been raised to 20 per cent. It required a strong pushback from taxpayers, including a social media storm before the Centre backtracked. It is not clear if post the exemption, the original objective of reining in outflows on overseas tourism will be achieved. As this newspaper has reported, the Centre cannot be faulted for keeping a watchful eye on outward remittances, given that the share of leisure travel has risen sharply. But its initial move was too blunt, delivering the middle class a nasty surprise. It could draft policies with more care and clarity.

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