In a recent move, the Finance Ministry of India, in alliance with the Reserve Bank of India (RBI), has brought about significant changes to the Foreign Exchange Management Act (FEMA). The key change being the inclusion of international credit card spending outside India under the Liberalised Remittance Scheme (LRS). This move follows a surge in overseas travel expenses by Indians. Statistics reveal a 104% rise in overseas expenditure totaling to 12.51 billion USD between April and February of the financial year 2022-23 compared to the previous year.
Inclusion of International Credit Card Spending in LRS
The recent amendment under FEMA aims to track high-value overseas transactions. However, this change does not apply to payments made for purchasing foreign goods/services from India. Prior to this amendment, the usage of international credit cards for expenses on trips abroad was not under the LRS purview. But, the omission of Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000, which excluded such spending from LRS, allows these transactions to count towards the overall LRS limit of 250,000 USD per person per financial year.
Tax Collected at Source: Implications
An important fallout of this amendment is the 5% Tax Collected at Source (TCS) levy applicable on such transactions until July 1st, 2023. Post this date, the TCS rate will increase to 20% for credit card spends outside India. Payments for education and medical purposes are exempt from these provisions. The framework for levying TCS on overseas credit card spending is still to be established, posing challenges for banks and financial institutions.
Impact on Compliance and Refunds
Banks and other financial institutions may face higher compliance burdens due to these changes. However, taxpayers can claim refunds on the TCS levy while filing tax returns, though they might face delay in funds release until refunds are initiated by the tax department.
About Liberalised Remittance Scheme
Launched in 2004 by the Reserve Bank of India, the LRS enables all resident individuals, including minors, to remit up to USD 2,50,000 per financial year for permissible current or capital account transactions. However, this scheme is not applicable to corporations, partnership firms, Hindu Undivided Family (HUF), Trusts etc. Once a remittance is made for an amount up to USD 2,50,000 during the financial year, the individual is not eligible for further remittances under this scheme.
Usage of Remitted Money under LRS
The money remitted under LRS can be used for expenses related to travel, medical treatment, study, gifts and donations, maintenance of close relatives, and more. It also allows for investment in foreign market shares, debt instruments, and immovable properties. Furthermore, individuals can open and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the scheme.
Prohibited Transactions under LRS
Certain transactions are specifically prohibited under Schedule-I or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000. These include trading in foreign exchange abroad, capital account remittances to countries recognized by the Financial Action Task Force as “non-cooperative countries and territories”, and remittances to those identified as having a significant risk of committing acts of terrorism.
Tax Collected at Source Explained
TCS is the tax payable by a seller, which he collects from the buyer at the time of sale of certain goods or services. The seller is obliged to have a Tax Collection Account Number (TAN) to collect and deposit TCS with the tax authorities. Post-collection, the seller must issue a TCS certificate to the buyer, who can then claim credit for this amount while filing his income tax return.
About Foreign Exchange Management Act, 1999
FEMA provides the legal framework for managing foreign exchange transactions in India. It came into effect on 1st June 2000, classifying all transactions involving foreign exchange as either capital or current account transactions. This classification is based on whether the transaction alters the resident’s assets or liabilities outside India or not.
