Govt Levies 1% Tax On Luxe Items. Will It Dent Consumption?

Sources said that concerns in the Narendra Modi government have risen over the rise in purchases of ultra-luxury goods, while the income tax net has not shown a commensurate rise.

Until now, the 1 per cent TCS was applicable for motor vehicles costing over Rs 10 lakh.

One of the sources also said that more items could be added to the list at a later stage.

The seller, responsible for collecting TCS, will have to disclose the amount in their quarterly TCS returns, and also provide a certificate to the buyer. The process will require quoting the PAN of both the buyer and the seller.

Earlier, Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman expressed concern over the minuscule number of taxpayers in India, even as sales of expensive items, including cars and other gadgets, kept rising.

More than 40 per cent of the cars sold in India are priced at over Rs 10 lakh.

However, the number of taxpayers with an annual income of over Rs 50 lakh stood at just about 9.39 lakh in 2023-24. Though the number is a significant jump from the 1.85 lakh in 2013-14, in a country like India, it constitutes a meagre percentage. Individuals showing a gross annual income of more than Rs 1 crore touched 3,50,129 in 2023-24, a jump of 323 per cent from 82,836 in 2013-14.

“The government wants to bring more accountability, and this move is expected to allow tax authorities to assess the income levels more appropriately. A large chunk of unaccounted for money goes into buying these ultra-luxury products,” Ashok Dhingra, senior partner at Ashok Dhingra Associates (ADA), a firm offering services related to tax, customs and regulatory laws, told The Secretariat.

The new rule, which is under Section 206C (1F) of the Income Tax Act, 1961, is already in effect from April 22.

Will This Dent Consumption?

Analysts said that this could somewhat discourage high net-worth individuals (HNI) from making big-ticket purchases, though the middle class will not be impacted.

“This may affect consumption in some ways, but the additional TCS will give more clarity and help the tax department in assessing people’s income levels,” Dhingra said, adding that this is because the onus will be on the seller to deduct the tax amount.

Sitharaman is betting on consumption to boost economic growth. While presenting the Union Budget this year, she announced that individuals who are covered under the new tax regime and earning up to Rs 12 lakh a year will be exempt from paying any income tax, due to the increase in standard deductions.

The Finance Minister also increased the threshold to collect TCS on remittances under the RBI’s liberalised remittance scheme (LRS), from Rs 7 lakh to Rs 10 lakh.