If the TCS payee is a taxpayer, he can claim credit for the TCS as his tax payment against regular income.
The Ministry of Finance has released Frequently Asked Questions (FAQs) on Tax Collection at Source (TCS) on foreign remittance through the Liberalised Remittance Scheme. The e-Gazette notification dated 16th May 2023 has omitted Rule 7 of the FEM(CAT) Rules, 2000.
On May 19, Government decided that any payments by an individual using their international Debit or Credit cards upto Rs 7 lakh per financial year will be excluded from the LRS limits and hence, will not attract any TCS. New rates are being implemented under the Liberalized Remittance Scheme (LRS) from July 1, 2023.
Why is TCS required to be collected?
Ans. Section 206C of the Income-Tax Act 1961 provides for TCS in the business of trading in alcohol, liquor, forest produce, scrap etc. Sub-section (1G) of the aforesaid section provides for TCS on foreign remittance through the Liberalised Remittance Scheme and on the sale of overseas tour packages.
Is TCS applicable to all remittances made abroad?
Ans. No. Only such remittances which are covered under LRS are liable to TCS.
What is the notification dated 16th May 2023 amending the FEM (CAT Rules, 2000?
The notification dated 16th May 2023 omits Rule 7 of the FEM(CAT) Rules, 2000. In effect, it removes the exemption given to the use of international credit cards for meeting his/her expenses by a person when he is abroad. Even earlier, all current account transactions undertaken on international credit cards in India were subject to Rule 5 of the FEM(CAT) Rules and covered under Liberalized Remittance Scheme (LRS). The notification dated 16th May 2023 does not effect any changes in the use of international credit cards by residents while in India.
What is Rule 7 of FEM(CAT) Rules, 2000?
Rule 7 of the FEM(CAT) Rules, 2000 exempted the use of international credit cards from the LRS for payments by a person towards meeting expenses while such a person is on a visit outside India.
What was the need for the notification?
While on a visit abroad, a person could use international debit cards or other methods or international credit cards for undertaking current account transactions. Payments by debit cards etc. have been treated as LRS even earlier. Due to the exemption under erstwhile Rule 7, expenditures through credit cards were not accounted for under the specified LRS limit, which has led to some individuals exceeding the LRS limits.
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 USD 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 is the reason behind the increase in rates of TCS?
Ans. The reasons for the amendment are:
The payment of TCS is not a final tax. If the TCS payee is a taxpayer, he can claim credit for the TCS as his tax payment against regular income and adjust it against the advance tax etc., payments accordingly. If the TCS is of a person not being a taxpayer, then the 20% rate on such presumed income is not high. The tax rate slab of 20% starts in the new regime for incomes over Rs 12 lacs and is 30% for incomes over Rs 15 lacs.
Instances have come to notice where the LRS payments are disproportionately high when compared to the disclosed incomes
• No changes in medical or Education expenses – Position stays as it was before the Finance Act 2023.
• Primary Impact only on investment in assets such as real estate, bonds, stocks outside India by HNI and tour travel packages or gifts to non-residents.
Those individuals remitting from their own funds are normally expected to be higher-income taxpayers, and for those remitting through institutional loans for education, a concessional rate of 0.5 % is provided.
What is the impact on travel and incidental expenses related to education and medical treatment
Ans. For TCS on remittance for travel and incidental expenses related to education and medical treatment, the rates of TCS as applicable to remittances for education and medical treatment, respectively, shall apply.
What modes of expenditure of foreign exchange are covered under FEM(CAT) Rules, 2000?
It includes the drawal of foreign exchange from an authorised person and use of an International Credit Card, International Debit Card or ATM Card. All such drawals for the purposes specified in Schedule III are eligible for the limit of US$2,50,000.
What are the purposes under FEM (CAT) Rules, 2000, under which a resident individual can avail of a foreign exchange facility?
As per Rule 5 of the FEM (CAT) Rules, 2000, Individuals can avail of a foreign exchange facility for the following purposes, as detailed in Schedule III of the Rules, within the LRS limit of USD 2,50,000 on a financial year basis. Prior approval of the Reserve Bank would be required for remittances exceeding the specified limits.
Saurrav Sood- Practice Leader- International Tax & Transfer Pricing at SW India
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. Through this, the individuals now will have to pay a TCS of 20% on such foreign transactions made through their 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 credit cards 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.
This will lead to a compliance burden on the credit card companies while individuals making petty expenses will have TCS provisions getting triggered since there is no threshold limit for the applicability of TCS.
Jyoti Prakash Gadia, Managing Director, Resurgent India
The notification issued by the DEA ministry of Finance relating to Foreign Exchange Management ( current account transaction) rules will have a far-reaching impact on foreign exchange transactions by foreign travelers while abroad.
Rule 7 of the above rules have been now deleted leading to the withdrawal of the exemptions available earlier relating to the personal expenses by foreign travelers while being abroad through international credit card.
This implies that the foreign exchange spending on personal transactions of expenses and gifts, medical treatment, etc shall be subject to a ceiling of US Dollar 2.50. lac, beyond which RBI approval shall be required. This will accordingly impose restrictions on foreign travel expenses while an individual is abroad and is aimed at scrutiny and conservation of such expenses.