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    The tax on credit card usage abroad that will kick in from next month has a dubious, amusing past

    Synopsis

    The Indian government's 20% tax on overseas credit card usage above INR7 lakh ($9,500) annually is designed to appear as though it is taxing those with the greatest ability to pay. Historically, this type of measure has been used to extract funds from the rich and wealthy, such as the levying of a hat tax in 18th-century Britain. However, it is unclear if consumption patterns indicate preferences and affluence. Tactically, such taxes have raised the ire of taxpayers, leading to evasion schemes or alternative avenues of spending outside the tax authority's reach.

    AP
    Krishnan Ranganathan

    Krishnan Ranganathan

    The writer is with a financial services company in Mumbai

    Luxuries ought to be taxed... because the first weight ought to fall on the rich and opulent - Frederick North, British prime minister (1770-82)

    The consumption or ownership of certain items signals ability to pay tax. GoI thinks overseas credit card usage exceeding ₹7 lakh in a year is one such item, attracting 20% tax collection at source (TCS). Such tax on items that signal affluence is a bit annoying. However, the objective - to appear to tax more those with greater ability to pay - is clear.

    While browsing the tax follies and wisdom through the ages, we come across 18th-century Britain's policymakers for whom hats offered two huge benefits:

    A rich person usually owned many expensive cocked hats, while a poor one possessed, at most, one cheap hat or none at all.

    It was easy to see if someone was wearing a hat.

    And, so, in 1784, the British government levied a 'hat tax', requiring each hat to have a revenue stamp pasted on its lining, with the cost of the duty depending on the cost of the hat. Huge fines fell on those who failed to pay the tax, with forgers attracting the death penalty. As you can imagine, to avoid the tax, milliners - hat-makers - stopped calling their creations 'hats', thus prompting the government to redefine and expand the tax to cover 'any headgear'.

    Wigs, being similarly hard to hide (except, of course, under a taxable hat) and synonymous with a degree of prosperity, also invited the attention of taxmen (and a host of creepy-crawlies). In 1795, the British government introduced an annual one-guinea tax on the right to apply the aromatic powders that men and women put on their wigs to mask odour. Since pigtails were still in vogue, these taxpayers were given the sobriquet of 'guinea pigs'.

    But, then, consumption patterns may not reflect preferences and affluence. Not all wealthy gentlemen owned derby horses, and even relatively poor folks may have had a fascination for hats and wigs.

    Logan Roots, a 19th-century American politician, spoke of a man who compared a tax to a boil he had on his nose. When he complained about it, his friend asked him, 'Where else would you like to have it?' He thought for a while, and then replied, 'Well, I believe I would rather have it on some other man's back.' The history of tax policymaking is mostly the story of people trying to put the boil on someone else's back, almost in the spirit of 'Don't tax you, don't tax me, tax the fellow behind that tree!'

    After all, money in the form of tax revenue has neither colour nor smell. On the latter, the phrase 'pecunia non olet' - money does not stink - emerged thanks to the Roman emperors Nero's and Vespasian's urine tax in the 1st century.

    Just because a tax is attached to some luxury item doesn't mean that the real burden falls on those luxuriating. So, the wider question is: who really bears the burden of taxation?

    We are reminded that 'the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest amount of hissing'. But why burden people with 20% TCS for overseas credit card usage? Isn't that a bit too high? If the main intention was to track these credit card transactions, wouldn't a nominal tax rate suffice?

    Again, if the concern was excess outgo of foreign exchange, wouldn't simply reducing the current annual $250,000 Liberalised Remittance Scheme (LRS) limit have served the purpose? (Experts have already pointed out that since overseas credit card spends were earlier never part of the LRS limit, it's difficult to imagine credit card spends causing the limit to exceed and requiring action from the government).

    And, then, there are, as with any tax, unintended consequences. Some say this move will likely push people to buy foreign exchange in cash and spur illegal hawala routes.

    Historically, we are aware of at least one attempt to tax the rich that failed due to, so it is believed, pride. Between 1901 and 1934, a toll of 2 NAf (Netherlands Antillean florin) cents was charged for crossing the Queen Emma Bridge across St Anna Bay in Curacao, Netherland Antilles, in the West Indies.

    Hoping to lighten the burden on the poor, the toll was levied only on those wearing shoes. Alas, the scheme boomeranged as many of the poor, too vain to admit their poverty, often borrowed shoes to cross the bridge and proudly paid the toll, while many rich Curacaoans, too mean to pay, crossed barefoot and dodged the tax.

    So, what is the way out of the overseas credit card usage tax? Well, for now, all we can do is close our eyes, plug our ears, shut our mouths and just pay through our nose - and 'feel proud' for paying the tax.
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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