International Credit Card Spending Outside India under LRS

• 20 May 2023

For Prelims: FEMA, Tax Collected at Source, Reserve Bank of India, Liberalised Remittance Scheme (LRS).

For Mains: Significance of Liberalised Remittance Scheme, FEMA

Why in News?

Recently, the Finance Ministry of India, in consultation with the Reserve Bank of India (RBI), has made significant amendments to the Foreign Exchange Management Act (FEMA), bringing international credit card spending outside India under the Liberalised Remittance Scheme (LRS).

• This comes in the backdrop of a surge in spending in overseas travel. Indians spent 12.51 billion USD on overseas travel between April-February of fiscal 2022-23, a rise of 104% compared to the same period of the last year.
• The inclusion enables the levy of the higher rate of Tax Collected at Source (TCS) as announced in the Budget for 2022-23 effective from 1stJuly 2023.

What are the Key Details and Implications?

• Inclusion of International Credit Card Spend in LRS:
  • The amendment is expected to facilitate the monitoring of high-value overseas transactions but does not apply to payments for purchasing foreign goods/services from India.
• Omission of Rule 7 and Expansion of LRS:
  • Previously, the usage of international credit cards for expenses during trips abroad was not covered under LRS.
  • Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000, which excluded such spendings from LRS, has been omitted.
    • This amendment allows international credit card transactions to be included in determining the overall LRS limit of 250,000 USD per person per financial year.
• Tax Implications:
  • A TCS levy of 5% will be applicable on such transactions until 1stJuly 2023 (except for medical and education-linked sectors).
  • After 1 stJuly 2023, the TCS rate will increase to 20% for credit card spends outside India.
    • The new provisions will not apply on payments for 'education' and 'medical' purposes and do not impact changes in the use of international credit cards by residents while in India.
  • The mechanism for levying TCS on overseas credit card spends is yet to be made functional, which poses compliance challenges for banks and financial institutions.
• Impact on Compliance and Refunds:
  • Banks and financial institutions may experience an increased compliance burden due to these changes.
  • Taxpayers can claim refunds on the TCS levy while filing tax returns, which could result in locked funds until refunds are initiated by the tax department.

What is Liberalised Remittance Scheme?

• About:
  • This is the scheme of the Reserve Bank of India, introduced in the year 2004.
  • Under the scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both.
• Not Eligible:
  • The Scheme is not available to corporations, partnership firms, Hindu Undivided Family (HUF), Trusts etc.
  • Though there are no restrictions on the frequency of remittances under LRS, once a remittance is made for an amount up to USD 2,50,000 during the financial year, a resident individual would not be eligible to make any further remittances under this scheme.
• Remitted Money can be used for:
  • Expenses related to travelling (private or for business), medical treatment, study, gifts and donations, maintenance of close relatives and so on.
  • Investment in shares, debt instruments, and buy immovable properties in the overseas market.
  • Individuals can also open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the scheme.
• Prohibited Transactions:
  • Any purpose specifically prohibited under Schedule-I (like the purchase of lottery tickets, proscribed magazines, etc.) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
  • Trading in foreign exchange abroad.
  • Capital account remittances, directly or indirectly, to countries identified by the Financial Action Task Force (FATF) as “non- cooperative countries and territories”, from time to time.
  • Remittances directly or indirectly to those individuals and entities identified as posing a significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.
• Requirements:
  • It is mandatory for the resident individual to provide his/her Permanent Account Number (PAN) for all transactions under LRS made through Authorized Persons.

What is Tax Collected at Source?

• TCS is the tax payable by a seller, which he collects from the buyer at the time of sale of certain goods or services.
• TCS is governed by Section 206C of the Income-tax Act, which specifies the goods or services on which TCS is applicable and the rates of TCS.
  • Some of the goods or services on which TCS is applicable are liquor, timber, tendu leaves, scrap, minerals, motor vehicles, parking lot, toll plaza, mining and quarrying, foreign remittance under LRS, etc.
• The seller must have a Tax Collection Account Number (TAN) to collect and deposit TCS with the tax authorities.
• The seller must issue a TCS certificate to the buyer within a specified time limit, showing the amount of tax collected and deposited.
• The buyer can claim credit for the amount of TCS deducted from his income while filing his income tax return.

What is Foreign Exchange Management Act, 1999?

• The legal framework for the administration of foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999.
• Under the FEMA, which came into force with effect from 1st June 2000, all transactions involving foreign exchange have been classified either as capital or current account transactions.
  • Current Account Transactions:
    • All transactions undertaken by a resident that do not alter his / her assets or liabilities, including contingent liabilities, outside India are current account transactions.
    • Example: payment in connection with foreign trade, expenses in connection with foreign travel, education etc.
  • Capital Account Transactions:
    • It includes those transactions which are undertaken by a resident of India such that his/her assets or liabilities outside India are altered (either increased or decreased).
    • Example: investment in foreign securities, acquisition of immovable property outside India etc.

Source: IE