Global stocks: Small investors may face brunt of 20% TCS
5 min read . Updated: 15 Feb 2023, 12:39 AM IST
PremiumInvesting in global stocks is no more a simple task for small investors
Investing in global stocks is no more a simple task for small investors. Consider this. You invest ₹1 lakh in global stocks but the amount debited from your bank account is ₹1.25 lakh. That extra ₹25,000 is the upfront payment towards taxes and other remittance fees. But, are you willing to shell out that extra upfront payment? This question has been plaguing Pranay Prasad, 29, since the budget proposed a hike in tax collected at source (TCS) to 20% on investments made overseas via the LRS, or Liberalised Remittance Scheme.
Gurugram-based Prasad has been planning to invest ₹10 lakh in US tech stocks but now he is unsure. “I don’t pay advance tax so I can’t adjust TCS against it. I can’t declare this as an investment either to my employer," he said. TCS can be claimed at the time of filing the income tax return.
Apart from hiking the TCS rate, the government also proposed to remove the ₹7 lakh minimum threshold beyond which TCS would apply.
“At least the threshold should have been retained. I’m not willing to idle away a huge chunk of my investible surplus for almost a year," said Prasad. To be sure, the government pays 6% interest per annum from the end of the financial year on the TCS amount.
Currently, remittances over ₹7 lakh attract 5% TCS. Other key remittances impacted by these proposals include tour packages, gifts, foreign transactions through debit and travel cards and purchase of immovable properties.
Data from the Reserve Bank of India (RBI) shows that about $19.6 billion was remitted outside India in 2021-22. Outward remittances under the LRS have been increasing steadily over the last few years and this trend was strong in 2022-23 as well. In November, the forex outflow under LRS was about $2 billion, up from $1.54 billion in November 2021.
Experts said the government could be trying to cash in on this steady growth in outward remittances under the LRS.
“It could be a step towards cash-flow management. TCS doesn’t give money to the government, so this hike won’t create revenue. Rather, it will create a generous cash flow. Also, it will discourage illegitimate transactions being done through the LRS channel," said Sitashwa Srivastava, co-founder and co-CEO, Stockal.
Under LRS, each Indian resident can remit up to $250,000 (about ₹2 crore) overseas in a financial year.
Of the $19.6 billion outward remittance pie in 2021, the largest portion of about $6.9 billion went towards travel. The share of investment in equity/debt stood at a rather modest $746 million. “Investments are a very small component of the total outward remittances and I feel the government’s focus was more on travel and other areas that have huge remittance volumes," said Srivastava.
But, the TCS hike will significantly push the upfront costs for those looking to invest in overseas securities. Cost of direct offshore investing is already quite high due to the forex spread and fees charged by banks (see graphics).
One can argue that the TCS credit can be claimed later and does not qualify as a cost per se. Delhi-based Sanjeev Kohli is one such investor. “Since the money will come back to me, I’m not discouraged," said the 62-year-old. “For me, the opportunity in global markets is far bigger than locking away the extra 20% cash," he added.
But, the same cannot be said for everyone as the hike along with the removal of ₹7 lakh threshold is most likely to create liquidity concerns for small investors in the form of large upfront cash outflow . “For small investors who invest ₹4-5 lakh, blocking an extra 20% will impact their cash flow," Srivastava added.
Who gets impacted?
Those who pay advance tax have an advantage. “While depositing the advance tax, taxpayers can reduce the TCS amount debited towards such transactions," said Mayank Aggarwal, partner designate, Luthra and Luthra Law Offices India.
However, this benefit is largely limited to the self-employed as TDS (tax deducted at source) is deducted from the monthly income of salaried individuals and in most cases, they are not required to pay advance tax. High-Net Worth Individuals (HNIs), salaried or not, stand to benefit from this.
Another segment that will be impacted comprises those in the lowest tax slab or don’t have a tax liability at all, such as students. “These taxpayers will end up paying more tax upfront than their actual tax liability. Of course, they can get the TCS refund after filing their ITR, but that would mean they have to lock-in the capital for almost one year," said Viram Shah, co-founder and chief executive officer, Vested Finance.
People with annual income of up to ₹10 lakh constitute half of Vested Finance’s total users, while another 30% fall in the ₹10-25 lakh income group. This category of investors have investible surplus of not more than ₹5-7 lakh. It is noteworthy that nearly 67% of the total users are salaried and about 10% are students.
On Stockal, the average ticket size of remittance is roughly ₹3 lakh and the average portfolio size is ₹5 lakh, indicating that small investors constitute a large chunk on the platform.
It is safe to say that large investors may not be impacted by these proposals at all. Small investors, on the other hand, are likely to be hurt on many accounts—from liquidity concerns to parting away with more tax than their liability.
“I believe the removal of the ₹7 lakh threshold will have a bigger impact than the hike in TCS rate on small investors," said Srivastava.
An unintended side effect of these proposals could be that investors might invest large amounts towards the end of the financial year to reduce the duration of locking away their funds. The same could play out in the current financial year as well. “Investors should not rush to invest huge amounts in overseas stocks before the end of the current financial year just to save the 20% TCS. Investment decisions based on tax-saving and not fundamentals of asset allocation, risk profile and goal-based approach can be detrimental to the overall investment portfolio," said Amit Suri, a mutual fund distributor.
What are the alternatives?
Alternatives to investing overseas via the LRS route are mutual funds (MFs) and exchange-traded funds (ETFs). However, it’s been one year since MFs stopped taking fresh subscriptions in schemes that invest in overseas stocks following a Sebi directive. The directive came after the MF industry crossed the authorized required limit of $7 billion for overseas investments.
Overseas ETFs have a separate $1 billion limit, which is still not exhausted. ETFs are a good low-cost alternative for overseas investment for those comfortable with trading in direct stocks.