Tax on outward remittance: Need to address the root causes

financialexpress.com:

The Union Budget 2023-24 proposed an increase in tax collection at source (TCS) for foreign outward remittances under Liberalised Remittance Scheme (LRS) to 20 per cent, applicable from July 1, 2023, with some exceptions for education and medical purposes. The implementation of the same has been deferred till October 1, 2023. Before this proposal, 5 per cent TCS was applicable on foreign outward remittances above Rs 7 lakh in a financial year. The most affected segments are overseas tour packages and all other purposes excluding education and medical treatment. Banks and financial institutions issued notices to their customer about the changes. 

The liberalized remittance scheme allows foreign exchange spending up to USD 250,000 per year. LRS is useful for individuals desirous of undertaking foreign travel and maintenance of relatives overseas, including investment, education, and medical treatment. It has allowed thousands of Indians to avail education, healthcare, tourism, and the purchase of foreign assets.

Before commenting on the desirability of this move, we must understand why the government had to implement the restrictive move. Even though India’s foreign exchange reserve situation is formidable, USD 596.098 billion for the week ended June 16, 2023, it did decline from its peak of USD 642 billion recorded in October 2021. The most pressing reason seems to have been driven by the increasing deficit in the Balance of Payments (BOP) caused by foreign travel. A glimpse of India’s travel account of BOP provides important clues. 

India used to be net positive in the travel account of BOP prior to the pandemic. These spends are driven by overseas tours vis-a-vis foreign individuals travelling to India for various