The issue of how to control and curb the flow of money leaving India seems to feature prominently in the minds of the Modi government’s officials of late, with the latest sign being deliberations at the Ministry of Finance on the “flight of capital” of high net-worth individuals (HNIs) out of the country, ThePrint has learnt.
The government had earlier this year announced a hike on tax collected at source (TCS) on international transactions, while Prime Minister Narendra Modi Sunday voiced concern over the trend of Indians going abroad to get married.
The matter of flight of capital of HNIs was discussed at the Chintan Shivir of the ministries of finance and corporate affairs, held in August at Kevadia in Gujarat.
ThePrint has accessed the minutes of the meeting, which reveal, apart from other things, that the government is even considering an exit tax to dissuade HNIs from taking their wealth out of India.
The meeting was chaired by Union Minister of Finance Nirmala Sitharaman and attended by Union Ministers of State for Finance Pankaj Chaudhary and Bhagwat Kisanrao Karad, among other senior officials of the two ministries.
At the meeting, officials stressed that a mere perception of flight of capital out of India could not become the reason for a “knee-jerk” reaction from the government.
“On the aspect of flight of capital from India, it was pointed out that the perception should be validated with factual analysis, and policy formulation should not be (a) knee-jerk reaction,” the minutes of the meeting said.
The mention of knee-jerk reactions came less than two months after the government in June was forced to retract its May notification that imposed a 20 percent tax collected at source (TCS) on credit card transactions conducted abroad.
The May announcement that included credit cards within the ambit of TCS had met with significant pushback from critics and supporters of the government alike, which prompted the issuance of a detailed FAQs document explaining the government’s rationale, before it was finally revoked in June.
However, the hike in the rate of TCS on other foreign remittances, from 5 percent to 20 percent, as announced in Union Budget 2023, remained in place and came into effect on 1 October this year.
“It was also pointed out that we should decide on the approach to be taken in policy (i.e.,) whether we should take a positive approach for retaining capital or a negative approach of introducing a regulatory bar on flight of capital,” the minutes of the meeting added.
Tax interventions
One of the suggestions made during the meeting to curb the flight of capital, if it was established to be happening, was to introduce a tax that could potentially dissuade the exit of capital from the country.
“There was a suggestion that in order to curb the flight of capital, exit taxation may also be considered as one of the policy interventions,” said the minutes.
Another set of suggestions to retain capital within the country included reforming the tax system in a way that would ease the filing process for companies. For example, one suggestion was to consider whether income tax statements and Goods and Services Tax statements could be filed at the same time, instead of separately.
A separate tax-related suggestion was for greater coordination between the direct and indirect tax departments of the finance ministry.
At the moment, the deliberations suggested, companies involved in international transactions are assessed separately by the income tax department and the customs authorities, often with differing results.
“While the objectives of the income tax and customs department may be at cross-purpose, the methodologies applied to arrive at the transaction price are almost similar if not the same,” the minutes read.
“There is a huge synergistic benefit if we try to provide a certainty in tax laws with respect to both the valuations,” they added. “Joint effort is needed to arrive at a policy formulation, but it would go a long way in easing the burden of compliance and give certainty to foreign investors.”
The Henley Private Wealth Migration Report 2023 estimates that India will see a net loss of about 6,500 HNIs in 2023, which is less than the net loss of 7,500 in 2022. In both years, India has been placed at the second and third position, respectively, in terms of absolute number of HNIs leaving the country. China is at the top spot in the rankings.
The issue of Indians going abroad to spend their money was also mentioned by PM Modi during his Mann Ki Baat radio address this Sunday.
“These days a new milieu is being created by some families to go abroad and conduct weddings,” Modi said. “Is this at all necessary? If we celebrate the festivities of marriages on Indian soil, amid the people of India, the country’s money will remain in the country.”