Complex rules make India seem permanently socialist

Opinion
Opinion

Summary

From new curbs on wheat stocks to a levy on our use of foreign exchange, too many moves are anachronistic

Next month, the long arm of the Indian tax man promises to take the fun out of foreign travel. The plan to levy a 20% surcharge on overseas spending of more than $8,500 annually promises to be a computational nightmare for individuals and businesses, accountants and banks alike. It’s all very well to say that business expenses will be exempt, but how will this play out if you run a small export business and combine a trip to the Guangzhou trade fair, say, with a short holiday in Hong Kong? Now there is a proposal that card holders make a declaration to their card issuers about the nature of their foreign expenses. Pity the banks that will have to track and report this. What if someone splits spending across multiple cards, chasing frequent-flyer miles perhaps but also inadvertently seeming to evade a tax audit? Surely, in this era of algorithms that can flag large transactions and Digital India purportedly being a model for the rest of the G20 to follow, there is an easier way to go about this.

It has been little more than a decade since then finance minister Pranab Mukherjee stunned the world by introducing the right to tax foreign mergers and acquisitions in India retrospectively, years after a deal was done. Governments come and go, but illogical tax demands remain. A recurrent theme is New Delhi’s implacability in the face of negative headlines. A rollback or two may follow, clarifications and amendments might ensue, but the Centre’s omniscience stays unchallenged.

Meanwhile, perceptions grow that this is a country of arbitrary action. A recent report from Henley& Partners, an advisory firm on investment-linked visas, flags “convoluted, complex rules relating to outbound remittance" as a big reason why an estimated 6,500 high-net-worth individuals quit India last year. An article in Mint on Wednesday has an anecdote about a taxpayer hauled into tax offices to explain a euro payment to him from a former employer of less than 2,000, proceeds from an employee stock offer programme of the MNC he worked for.

One could argue that it will be easy to distinguish between a business trip and a holiday when one files one’s taxes. But, it raises the complexity of tax filing and will increase the number of forms to be filled and explanations sought by your friendly neighbourhood bank. I signed a four-page form sent to me by HSBC last year, declaring, among other things, that a $120 payment I was making for a yearly FT Weekend subscription did not exceed the $250,000 annual limit under the liberalised remittance scheme (LRS). Last week, a payment via my credit card for my Microsoft office subscription failed, thanks to the Reserve Bank’s needlessly meddlesome rules. A New Zealand fitness company I took a subscription from at a reasonable 800 a month, in return for superb online classes ranging from spinn bikes to Pilates and yoga, now receives its payment from my eldest brother in the US. As per new rules introduced this year to police endorsements by ‘influencers’, I disclose that I have no “material" interest in praising this unnamed firm.

For those who think these rules are directed only at the urban middle and upper middle class, the introduction of inventory limits for wheat stocks held by traders this month is proof that mindless controls are an equal-opportunity affliction. This new rule came in even as food inflation began to ease and the Centre claimed a large increase in domestic wheat production. Farmers, of course, are used to routinely facing export bans when prices of the commodities they sell rise. They need to make hay when the sun shines, given that they are exposed to the vagaries of volatile weather and equally unpredictable global markets. Decades ago, Jagdish Bhagwati characterized the Indian government’s approach to regulation as emblematic of one conceived by people running the system—rather than by people who the system runs over.

In the case of India’s new rules pertaining to spending overseas, if the subtext is a government concern that allowing $250,000 in remittances under the LRS is, well, a bit too liberal, why not just lower the limit? Yes, that seems illogical too, given our huge reserves, with over $100 billion typically flowing in annually by way of inward remittances from our global diaspora, and India’s declining current account deficit, but it seems far more workable.

The paranoia over outward flows is overdone. For one thing, despite the negative headlines about the rich exiting India in the Henley report’s wake, India only lost 1.9% of its dollar millionaires last year. Our IITs are making millionaires much more rapidly than India is losing them. Nandan Nilekani’s bequest to IIT Mumbai this week was almost $40 million; we are not short of potential philanthropists, let alone millionaires.

The World Bank estimates that India received $111 billion in inward remittances from its increasingly professional diaspora in 2022, the highest in the world. I was surprised that under the LRS, $27 billion was sent or spent overseas by Indians in the last financial year, according to an article in Mint by Howindialives.com. About half was for travel, 12% for studies. Some 15% went out for the maintenance of relatives abroad, however. Who are these unfortunate NRIs? The nation needs to know. We are a universe away from a 1991 style balance-of-payments crisis, thanks to our service exports and diaspora’s remittances, but, in a permanently socialist country, one can’t always count on good sense to prevail.

Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.

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