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India imposes 20% tax on outward remittances, exempts educational and medical expenses
On February 1st, 2023, the Indian government proposed a significant increase in tax on outward remittances from 5% to 20% during its annual budget presentation. If passed by parliament, the tax would come into effect on July 1st, 2023. The increased tax rate would apply to all remittance transactions, not just those exceeding $8,500, and would include spending on vacations, investments, and gifts. However, educational and medical expenses would be exempt from the tax.
The proposed tax hike aims to target wealthy citizens who engage in tax avoidance practices. The government hopes to collect more revenue from high-net-worth individuals (HNIs) who transfer large amounts of money abroad. Financial experts suggest that this move is an attempt to make HNIs pay their dues before leaving the country for good. According to The Times of India, 30,000-35,000 HNIs had left India over the past five years, mostly emigrating to countries such as the US, UK, UAE, Canada, Australia, Singapore, and Europe. For 2022 alone, the figure was estimated at 8,000.
While the tax hike aims to target wealthy individuals, it may also impact less wealthy families who send money overseas to support their loved ones. The tax would be applicable to all remittance transactions, and any funds collected by banks would be adjusted against an individual’s overall tax liability. However, this process requires individuals to pay a sizeable sum of money upfront, only to receive it as a tax adjustment or refund months later.
One such individual who may be affected by the proposed tax is Gopalakrishna Menon, a retired Indian Air Force personnel who currently resides in the southern Indian state of Kerala. He is the primary sponsor of his daughter’s master’s degree at the UK’s Sheffield Hallam University and is concerned about how the proposed tax rate will impact the money he sends to his daughter. Menon explained that there are expenses other than tuition fees alone that one needs to take care of. The amount comes to around Rs 1 lakh (a little over $1,200) per month, including rent, food, travel, and other essentials. Menon worries that if this amount is taxed, his plans will go awry. He added that he cannot afford to pay so much and must plan to make a lump sum transfer before July 1st.
The previous law allowed individuals to send up to $250,000 per annum overseas without attracting any taxes, as long as the money was sent in tranches of less than $8,500 each. This meant that a family of four, including minors, could send up to a million dollars abroad annually. However, the proposed change targets those who transfer large amounts abroad without commensurate income tax payments.
In conclusion, while the proposed tax hike aims to target wealthy individuals who engage in tax avoidance practices, it may also impact less wealthy families who send money overseas to support their loved ones. The increased tax rate will be applicable to all remittance transactions and may require individuals to pay a sizeable sum upfront, only to receive it as a tax adjustment or refund months later.
Source: The Quartz
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