THE CENTRAL Government, in consultation with the Reserve Bank of India, in a late night notification Tuesday amended rules under the Foreign Exchange Management Act, bringing in international credit card spends outside India under the Liberalised Remittance Scheme (LRS). As a consequence, the spending by international credit cards will also attract a higher rate of Tax Collected at Source (TCS) at 20 per cent effective July 1.
The notification brings transactions through credit cards outside India under the ambit of the LRS with immediate effect, which enables the higher levy of TCS, as announced in the Budget for 2022-23, from July 1. This is expected to help track high-value overseas transactions and will not apply on the payments for purchase of foreign goods/services from India.
Prior to this, the usage of an international credit card to make payments towards meeting expenses during a trip abroad was not covered under the LRS. The spendings through international credit cards were excluded from LRS by way of Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000. With the latest notification, Rule 7 has now been omitted, paving way for the inclusion of such spendings under LRS.
“It is strictly for transactions under Schedule III (of the FEM rules) and not for payments for purchase of foreign goods/services. This demand had come from the domestic travel industry,” a finance ministry official said.
This comes in the backdrop of a surge in spending in overseas travel. Indians spent $12.51 billion on overseas travel between April-February of fiscal 2022-23, a rise of 104 per cent compared to the same period of the last year, albeit over a low base due to Covid-linked travel restrictions.
According to the latest data released by the RBI, in April-February of FY2022, the total amount spent by domestic travellers on international destinations was $6.13 billion under the RBI’s LRS for resident individuals.
Technically, a TCS levy of 5 per cent will come into effect on such transactions till July 1 (except for medical and education-linked sectors), which would then increase to 20 per cent after July 1. However, industry players said the mechanism to levy TCS on overseas credit card spends has not been made functional as of now. Experts said the changes for the credit card spends are expected to add to the compliance burden of banks and financial institutions.
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Under the LRS scheme, Indian residents are allowed to remit up to $250,000 (approximately Rs 2.06 crore) per year without any prior approval from the RBI. Other operational guidelines about the credit card spends are expected to be issued later.
The government had changed the limits for TCS for foreign remittances in the Budget for 2023-24. The Budget had stated that on foreign outward remittance under LRS, other than for education and medical purposes, a TCS of 20 per cent will be applicable from July 1, 2023. Before this proposal, the TCS of 5 per cent was applicable on foreign outward remittances above Rs 7 lakh and 5 per cent without any threshold for overseas tour package.
ExplainedSurge in overseas travel
THE MOVE comes in the backdrop of a surge in spending in overseas travel under LRS, which zoomed 104 per cent between April-February in FY23. The implementation of the TCS on credit card spends abroad could potentially increase the compliance burden for issuing banks and likely result in funds of individuals getting locked till the time actual refunds get initiated by the tax department.
TCS is a direct tax levy, which is collected by the seller of specified goods from the buyer and deposited to the government. Taxpayers can then claim refunds on the TCS levy at the time of filing tax returns, which some experts pointed out could result in funds of individuals getting locked till the time actual refunds get initiated by the tax department.
In March, while moving the Finance Bill 2023 for consideration and passage in the Lok Sabha, Finance Minister Nirmala Sitharaman had said that the Reserve Bank of India has been asked to look into ways to bring credit card payments on foreign tours under the LRS.
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“It is interesting to note that Rule 7 was introduced almost 20 years back as a liberalisation measure to exempt international credit card transactions from the ambit of restrictions set out under Rule 5, i.e., transactions included in Schedule III to Current Account Transaction Rules, 2000 requiring prior RBI approval beyond monetary ceilings. Further, no separate monetary/item-wise ceiling was imposed by the RBI for use of international credit cards when the amendment was made,” said Nischal S Arora, Partner-Regulatory, Nangia Andersen India.
“Thus, the use of international credit cards by residents on a visit outside India or even for international purchases on the Internet were hitherto not supposed to be included while computing the overall LRS limit of USD 250,000 per person per financial year. The same now having been omitted makes sure that international credit card transactions are also considered for the purposes of determining the limit of USD 250,000 under LRS,” he said.