Even as the airports were overflowing with teeming Indian travellers heading out to offshore vacations, the Indian government delivered a shocker on May 16, bringing credit cards under the ambit of Liberalised Remittance Scheme (LRS) making them liable to be taxed, with the tax collected at source (TCS). It triggered a public outcry to which the government did bend a little, but some anomalies and worries remain. Let us try to understand the issue at hand.
The basics
LRS is a provision made by the Reserve Bank of India, allowing Indian residents to send or spend up to $250,000 in a financial year outside the country.
TCS is a mechanism for quicker tax collection on the lines of tax deducted at source (TDS), only it is an additional amount collected as tax by a seller on specific goods (in this case credit) from the buyer, over and above the sale amount. Section 206C (1G) of the Income Tax Act, 1961, allows TCS on foreign remittance through LRS.
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Run-up to the new diktat
Presenting the Union Budget for FY24 on February 1, the Union Finance Minister, Nirmala Sitharaman, proposed to raise the TCS rate on foreign remittances through LRS from 5 per cent to 20 per cent. On March 24, while passing the Finance Bill, 2023, she observed that ‘payments for foreign tours through credit cards’ are not being captured under the LRS and are escaping the TCS net. RBI was requested to look into the issue with a view to bringing those payments under the LRS ambit. (RBI has, reportedly, been monitoring all international transactions done with credit cards, debit cards and UPI (through authorised dealers) on a monthly basis, since April 2021 .)
On May 16, the Finance Ministry notified the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023, to bring all credit card spending abroad under the LRS ambit. Vide this notification, the Ministry has omitted the erstwhile Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, which exempted the use of international credit cards from the LRS for payments by a person while outside India with immediate effect. The omission enabled the ministry to levy 20 per cent TCS on certain spending abroad from July 1.
Government’s rationale
Reacting to the public outrage that ensued, the Finance Ministry came out with a set of FAQs to explain its position on May 18. The primary among these, was that LRS payments are disproportionately high compared to the disclosed incomes. It was also argued that the move will bring parity in the tax treatment of remittances using debit and credit cards while also allowing tracking of high-value transactions. More pertinent is the backdrop of the recent upsurge in outward remittances/global spending, which have doubled to $27 billion.
The worry
While the government tried to assert that the taxpayers have the option to reclaim the levy as adjustment against ‘advance tax payments’ or seeking ‘refund’ while filing their income tax returns, the persisting worry was that the high rate of 20 per cent would effectively block the taxpayers’ funds until they are able to access the refund, which they can do only in the next financial year.
On May 19, the Finance Ministry decided to allow exemption up to Rs 7 lakh per annum on foreign remittances made with international debit or credit cards, keeping the payouts outside the LRS purview.
However, this is no relief for high net-worth individuals or high ranking company executives travelling abroad. It also places the burden of compliance on banks, which may be blindsided about their clients’ payouts using other cards and if they’ve breached their permissible Rs 7 lakh limit.
The road ahead
Last week, Chief Economic Advisor V Anantha Nageswaran, speaking at an event, informed that the government is working towards linking TCS payments made by an individual to the TDS from his or her income sources, so it does not affect cash flows. Hope this is expedited.
For now, taxpayers need to familiarise themselves with the statutory obligation to pay applicable TCS, maintain proper records of overseas expenses, keep an eye out for the annual information statement (AIS) - flagging any discrepancies promptly, file the relevant return on income and, of course, stay tax compliant.
(The writer is Founder & CEO of Shree Tax Chambers)