Opinion
Government must invite feedback before announcing new policies
Summary
- A more organised and transparent process would help prevent frequent flip-flops, which do nothing to change India’s reputation for policy uncertainty
On the evening of 28 June, the government said it had decided to defer the implementation of the 20% tax collected at source (TCS) on international payments made through credit cards under the liberalised remittance scheme (LRS). Card-issuing banks, which were to start collecting this tax from July 1, will now do so from October 1. The government also said the TCS would only apply to international credit card spending above ₹7 lakh in a year and not all spending, as originally planned.
The government notified its original decision to apply the 20% TCS across the board on 16 May, triggering a public outcry, most notably on social media. Credit card users railed against the decision, saying their money would be locked up for months. Issuer banks fretted about how to deal with customers with multiple cards and about the complexity of tracking reversed and disputed transactions.
Wednesday’s press statement showed the government took this feedback on board, but the episode did little to dispel the notion that it announces policy decisions without thinking them through and is later forced to make changes following an outcry.
Two issues must be separated here. The first is the thinking behind the decision to charge 20% TCS on international credit card spending. The government has been at pains to explain that the tax is not meant to shore up revenues but to catch tax evaders. But as SnapView wrote earlier, tax authorities don’t need TCS to detect tax evasion as they already have international spending trails in their vast database of credit card transactions. All they need to do is mine this data to catch tax evaders.
Taxpayers thus weren’t wrong to complain that the move would inconvenience them simply because the tax authorities failed to make good use of information they already had. They also said it would give tax officials another tool to harass honest taxpayers.
The original decision did little to improve the tax department’s reputation, and neither did Wednesday’s clarification. India already has a reputation for policy uncertainty precisely because of such episodes. Flip-flops aren’t limited to politically sensitive policies such as the farm laws, which Parliament was forced to repeal in late 2021 after widespread protests by farmers. The Economic Survey 2018-19 emphasised the need to reduce policy uncertainty, so the government is clearly aware of how its image is suffering. Yet, the flip-flops continue.
The reason for this is unclear: is there pressure to take decisions quickly or in secrecy? In most cases, holding consultations beforehand could help avoid much of this chaos and uncertainty. Why must the government wait for a public outcry to calibrate policies? Speedy decisionmaking doesn’t necessarily lead to efficient and high-quality policymaking. And what use is secrecy if it comes at the cost of credibility?
These issues could easily be resolved by inviting feedback before announcing decisions. The government should institute healthy mechanisms to simultaneously maintain all three objectives: robust policymaking that will not require frequent recalibration, policy secrecy, and a consultative approach in which feedback is taken on board before decisions are notified. Reducing policy uncertainty is especially important since the government is going all out to woo investors and create a sustainable cycle of private investments to fuel India’s economic growth.
