Introduction:
As per Section 206C(1G), of the Income Tax Act 1962, any person being an authorized dealer, who receives an amount for remittance out of India from a buyer, being a person remitting such amount out of India under the Liberalized Remittance Scheme of the Reserve Bank of India; shall, at the time of debiting the amount payable by the buyer or at the time of receipt of such amount from the said buyer, by any mode, whichever is earlier, collect from the buyer, the TCS applicable. From 01.10.2020, any amount or aggregate of the amounts being remitted outside India by a person resident in India under the LRS Scheme of RBI in excess of Rs. 7 Lakh in a F.Y will attract TCS @5%. Provided also that the authorized dealer shall collect a sum equal to 0.5% of the amount or aggregate of the amounts in excess of seven lakh rupees remitted by the buyer in a financial year, if the amount being remitted out is a loan obtained from any financial institution as defined in section 80E, for the purpose of pursuing any education
LRS Scheme of RBI:
Under LRS Scheme, an Individual person who is resident in India as per FEMA is permitted to remit outside India fund up to US$ 2,50,000 per financial year (April to March) without any approval of RBI for any permitted current account or capital account transactions or both such as opening foreign currency account abroad, purchase of property or making investments abroad, private visit, gift/donation, business trip, medical treatment, studies abroad, going abroad on employment, etc. This scheme is available only to Individuals (including minors)and not to corporates, Partnership firms, LLP, HUF, etc. 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 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
Changes Applicable from July1, 2023:
On May 16, 2023 the Ministry of Finance issued a notification mentioning to omit rule 7of the Foreign Exchange Management (Current Account Transactions) Rules, 2000. They shall come into force on the date of their publication in the Official Gazette, according to the notification.
Rule 5 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, said, “Every drawal of foreign exchange for transactions included in Schedule III shall be governed as provided therein: Provided that this rule shall not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) Account of the remitter. “According to a notification by the Reserve Bank of India dated May 26, 2015, the revised Schedule III said: Individuals can avail of foreign exchange facilities for the following purposes within the limit of $2,50,000 per annum. Any additional remittance in excess of the said limit for the following purposes will require prior approval of the Reserve Bank of India.
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 specialized 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
9) Any other current account transactions.
Now, with the omission of rule 7 of Foreign Exchange Management (Current Account Transactions) Rules, 2000, the credit card payments for transactions falling under Schedule III transactions will come under LRS.
Credit card spending in a foreign currency will now be a part of LRS’s annual limit of $2,50,000 per person. Further, amount remitted in excess of Rs.7 Lakhs will be subject to tax collected at source (TCS). Budget 2023 has increased TCS for foreign remittances under the LRS from 5 per cent to 20 per cent(except for education and medical purposes)
The onus of collecting this payment is going to be on the authorized dealer, i.e., the bank which has issued the credit card, said many experts. The bank would now collect an additional amount of 20 per cent from the credit card holder to deposit the same as TCS. The TCS collected would be deposited in the credit card holder’s PAN which can be adjusted against any income tax liability for that financial year.
Conclusion:
Put simply, credit card spending in a foreign currency will now be a part of LRS’s annual limit of $2,50,000 per person. Further, amount remitted in excess of Rs.7 Lakhs is subject to tax collected at source (TCS) @20%.
(This note is articulated by Lokeshwaran R, Deputy Manager at R V K S And Associates)