Anushruti Singh
The Ministry of Finance detailed the modifications made to the FEMA rules on Thursday, which bring international credit card spending within the RBI’s liberalised remittance scheme (LRS).
This clarification in the form of FAQs comes after the many instances that have come to notice of finance ministry where the LRS payments are disproportionately high when compared to the disclosed incomes.
According to the notification, since credit card spending overseas has now been brought under LRS, such remittances would be liable to tax collected at source (TCS) at applicable rates.
Which means, TCS for spending through international credit cards under RBI’s Liberalised Remittance Scheme on overseas tour packages and any other remittance (such as for bonds, shares, and real estate gifts) will be exempted within the annual limits of US$ 250,000, the government clarified on Thursday. for these cases, when it crosses US$ 250,000 per fiscal, will be now at 20 per cent from July 1, against the earlier 5 per cent.
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Only exception to this amended LRS rule will be applicable for payments made through money held in RFC account in a bank in
India.
Transactions such as
1) Private visits to any country (except Nepal and Bhutan)
2) Gift or donation
3) Going abroad for employment
4) Emigration
5) Maintenance of close relatives abroad
6) Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/check-up.
7) Expenses in connection with medical treatment abroad
8) Studies abroad
Any additional remittance in excess of the said limit ($2.5 Lakhs PA) for the following purposes will require prior approval of the Reserve Bank of India.
Importantly, taxpayers can reclaim the 20% TCS as a credit against their income tax liability.
What was the concern
Data collected from top money remitters under LRS reveals that international credit cards are being issued with limits in excess of the present LRS limit of US$ 2,50,000. The differential treatment between debit cards and credit cards needed to be removed in the interest of uniformity and equity in the treatment of modes of drawal of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits.
RBI had written to the government on more than one occasion, pointing to the need to remove this differential treatment.
What experts are saying
This announcement sparked widespread debate over whether hike in taxation is a burden or a convenience. Overall, it’s a mixed bag of what and how its going to pan.
Aditya Malik, Startup Mentor, Confederation of Indian Industry (CII) strongly feels it’s a positive step, which is going to help curb taxation frauds.
“It aims to capture the set of people that are misusing international credit cards, and billing it to an Indian entity or national banks in the name of business expense internally or otherwise, however in reality it is used to purchase luxury items,”
According to him, with this rule being implemented, Indian residents that are travelling abroad and making bonafied expenses on-behalf of an organisation including startups or otherwise will come under the Foreign Exchange Management (Current Account Transactions) TCS ruling, however, this does not impact startup expenses since they still come under LRS.
“So, if a startup employee goes to attend a conference in London – the coffee or travel purchases that are made on credit, these rules do not apply to you as these are bonafide, and there is no cash flow crunch that will come from it.”
“Hence, this is a good move by the Finance minister trying to capture that ultra HNI segment and in the long run, hopefully the tax implications on individuals and overall ecosystem will be reduced due the extra TCS captured from such purchases. There is no change on SaaS subscription or other payments made by startups using international credit cards or their employees on behalf clearly,” he explained.
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Kunal Savani, Partner, Cyril Amarchand Mangaldas also feels that post July govt may see increase in tax filing.
“In many past instances, persons remitting the funds overseas (mainly for travel purpose) would accept 5 per cent TCS as additional cost and not file their Indian income tax returns. Higher TCS rate (20 per cent makes it almost mandatory for individuals remitting funds overseas to file their Indian income tax returns and claim the TCS paid either as refund or adjust it against their tax liability,”
At the same time, according to the notification, remittance for the purpose of education and medical treatment will continue to be at 5 per cent on aggregate amounts exceeding Rs 7 lacs in a financial year.
Tightening the noose
Earlier debit cards payments were already covered under the LRS, while expenditures through credit cards were not accounted for under the specified LRS limit. Experts feels it is going to be challenging for the tax payers, while discouraging for the holidayers.
Saurrav Sood- Practice Leader- International Tax & Transfer Pricing at SW India speaks that the amendment to the foreign exchange management act by deletion of Rule 7 has led to the tightening of a noose on individuals spending money on international travel through credit cards.
“This will lead to a compliance burden on the credit card companies to ensure that TCS is collected on such purchases made. Apart from international travels, many employees were using their CCs for petty expenses for which they were seeking reimbursement from employers later, however, with this amendment, these transactions will also come under the TCS mechanism and will now get reported,”
Savani said separately, 20 per cent TCS for travel expenses can also be seen as an indirect measure to support our Indian tourism industry which was the worst hit during the pandemic. But, this move will discourage many residents from overseas travelling and look at travel destinations within India.
While it is going to be a compliance burden on the credit card companies, says Sood. “While individuals making petty expenses will have TCS provisions getting triggered since there is no threshold limit for the applicability of TCS,”
Gopal Bohra, Partner- N.A. Shah Associates LLP thinks this change will impact an individual’s cash flow. “Because there will be a Tax Collection at Source (TCS) on all foreign payments through credit cards, whether online or outside India. From 16.05.2023 until 30.06.2023 TCS will be collected at 5 per cent and effective from 1.7.2023 it will be at 20 per cent”
According to Subhashis Kar, Founder & CEO of Techbooze Consultancy Services TCS structure change, brings about a mixed impact in India. But the actual effects on the economy will manifest after the implementation in July.
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“Notably, this change excludes the medical and educational sectors and aims to combat black money by imposing restrictions on transactions exceeding $250,000, requiring RBI approval. However, it adds a financial burden to foreign trips and transactions. Importantly, taxpayers can reclaim the 20 per cent TCS as a credit against their income tax liability. And since the government intends to utilise the tax revenue for social welfare programs and infrastructure development, this is a significant stride towards national progress.” he says.
Overall the decision will have a big impact on both enterprises and people.
Somya Srivastava, CEO of Prayatna Microfinance also weighs in her comments. According to her businesses will now have greater compliance duties since they must make sure that TCS is correctly collected and remitted to the government.
“Additional negative effects include increased transaction prices and administrative work. Due to the source deduction of 20 per cent, people who conduct foreign transactions will see a reduction in the flow of money. This can influence their capacity to plan their finances and pay for certain expenses abroad,”
Although a variety of transactions are subject to the 20 per cent TCS on overseas transactions, there are some exceptions and factors to consider. The TCS can be claimed as a credit by individuals against their overall tax obligation, potentially lowering it.
Additionally, some transactions could be exempt from the TCS rules, including those carried out by diplomatic missions, international organizations, and specific government entities.
The Indian government has taken a big move to increase tax compliance and prevent tax evasion by imposing a 20 per cent TCS on overseas transactions. Businesses and individuals should carefully evaluate the impact on their operations and financial planning even though it attempts to achieve these goals. Effectively navigating this new taxing landscape will need knowledge of the regulations, professional counsel, and exploration of available exemptions.
