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Recent changes in Liberalised Remittance Scheme ('LRS')

Amendments to bring International Credit Card Transactions within the ambit of the Liberalised Remittance Scheme of the RBI


On 16.05.2023, the Department of Economic Affairs, Ministry of Finance, Government of India, issued a Notification bearing no. G.S.R. 369(E), titled as the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023, (‘Amendment of 2023’) which essentially omits Rule 7 from the Foreign Exchange Management (Current Account Transactions) Rules, 2000 (‘Rules of 2000’) with immediate effect. As a result, the Central Government has effectively annulled the Exemption that was afforded to transactions through international credit cards. The Central Government has stated through the said notification that the change brought about by the Amendment of 2023 is considered necessary in public interest and is in consultation with the Reserve Bank of India (‘RBI’). However, the same is anyhow the sole ground for making a change in the said rules under the proviso to Section 5 of the Foreign Exchange Management Act, 1999 (‘FEMA’). Further, no reason has been afforded vide the Notification dated 16.05.2023 for the omission of Rule 7 in its entirety and hence, the playground of speculation remains open for experts and academicians.


By way of a background, the Rules of 2000 were originally published in the Gazette of India vide G.S.R. 381(E) on 03.05.2000 and since then, have been amended 13 times. Interestingly, Rule 7 that has now been omitted by the Amendment of 2023 was also inserted by one of these 13 previous amendments in January 2003.


The literal consequence of the Amendment of 2023 is that now, prior approval of the RBI would have to be taken by any individual to use his international credit card for making payment towards meeting expenses while on a visit outside India, beyond the limit of Rs. 7 lakhs per financial year. However, the proviso to Rule 5 of the Rules of 2000 continues to have effect and hence, no prior approval of the RBI is required to be taken by any individual where the payment is made from funds held in his Resident Foreign Currency (RFC) Account. Accordingly, the prior consent obligation will kick in only if the prescribed caps are breached.


With this, the Central Government has brought the international credit card usage abroad under the ambit of Liberalised Remittance Scheme (‘LRS’), that would naturally result in higher Tax Collection at Source (‘TCS’). However, this change is to be affected from 01.07.2023 as against the Amendment of 2023 that is effective immediately.


It is relevant to note that these recent changes do not come as a surprise in view of the Union Budget Speech 2023-24 delivered by Smt. Nirmala Sitharaman, Minister of Finance, on 01.02.2023. It was clearly stated in D.7 to the Annexure to Part B of the Union Budget that the rate of TCS for foreign remittances for education and for medical treatment is proposed to continue to be 5% for remittances in excess of 7 lakhs. Similarly, the rate of TCS on foreign remittances for the purpose of education through loan from financial institutions is proposed to continue to be 0.5% in excess of 7 lakhs. However, for foreign remittances for other purposes under LRS and purchase of overseas tour program, it is proposed to increase the rates of TCS from 5% to 20% (Reference: Nirmala Sitharaman, in Union Budget 2023-24, Ministry of Finance, https://www.indiabudget.gov.in/).


About LRS – The FEMA of 1999 provides for rules for foreign remittance from India that includes LRS which permits any permanent Indian to spend up to the prescribed limit without having to contact the RBI for any approval. Under the LRS, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both (Reference - Liberalised Remittance Scheme (2023), https://m.rbi.org.in/scripts/FAQView.aspx?Id=115#Q1). LRS was introduced back in early February of 2004 with a prescribed limit of USD 25,000. The said limit was thereafter revised in accordance with the prevailing macro and micro economic conditions.


About TCS – TCS is a tax which is payable by a seller that he collects from the buyer at the time of sale of goods and is further remitted to the government account. Section 206C of the Income Tax Act, 1961, provides a list of goods on which the seller should collect tax from buyers such as liquor and tendu leaves. All such transactions (with the exception of the fields of medicine and education) will, at the interim, be subject to a TCS of 5% and thereafter from 01.07.2023, all transactions will be subject to a 20% fee. However, it is to be noted that the Amendment of 2023 does not affect medical expenditure, education expenses and the use of international credit cards by residents while in India.


The Ministry of Finance, on 19.05.2023, issued a clarificatory note on the applicability of TCS to small debit/credit transactions under LRS wherein it has been expressly stated that any payments by an individual using their international Debit or Credit cards up to Rs. 7 lakh per financial year will be excluded from the LRS limits and hence, will not attract any TCS. It was further clarified that existing beneficial TCS treatment for education and health payment will also continue. (Reference - Clarification regarding applicability of Tax Collection at Source to small Debit/Credit Transactions under LRS, Press Information Bureau (2023), https://pib.gov.in/PressReleasePage.aspx?PRID=1925592)


For simple understanding, let us say you are going abroad for winter vacations this year with a credit card that has a limit of up to Rs. 10 lakhs. When you use that credit card at the hotel, for shopping and for all your shenanigans and end up spending a total of Rs. 6 lakhs, you shall have to pay Rs. 1.20 lakhs as TCS, in addition to GST that your bank may charge on your transactions. This sum of Rs. 1.20 lakhs will be deposited to the Government by your credit card issuing bank against your PAN and you may claim the same at the time of filing your Income Tax Return. The following table provides the precise representation of the impact of the recent changes in LRS.

SN

Type of Remittance

Before Amendment of 2023

After Amendment of 2023

1.

For education (when the funds are obtained as a loan from a financial institution)

No TCS on a remittance up to INR 7 lakhs. 0.5% of the amount or the aggregate amount exceeding INR 7 lakhs.

No change

2.

For education (other than sr. no. 1) or for the purpose of medical treatment

No TCS on a remittance up to INR 7 lakhs. 5% of the amount or the aggregate of the amount exceeding INR 7 lakhs.

No change

3.

Abroad tour packages

5% Tax Collected at Source (without any threshold limit)

20% Tax Collected at Source (without any threshold limit)

4.

All other use cases

5% of the amount or the aggregate of the amount exceeding INR 7 lakhs

20% Tax Collected at Source (without any threshold limit)

It has been opined that such changes will mainly affect only the wealthy when they buy property or shares abroad and not the IT sector workers going outside India for business trips. This is because when employees are deputed by their firm to travel abroad for work, the expenses incurred thereto are borne by such deputing authority. Hence, such expenses fall under the head of Residual Current Account Transactions that sit outside the purview of LRS.


Another opinion put forth is that the objective behind such change is to help track high-value foreign transactions. This opinion has received more weightage as the Finance Ministry stated that the changes were necessitated as some instances have come to notice where the LRS payments were “disproportionately high” when compared to the disclosed incomes. (Reference - Here’s What Experts Say About Changes Made In LRS For Credit Cards, NDTV Profit (2023), https://www.ndtv.com/business/heres-what-experts-say-about-changes-made-in-liberalised-remittance-scheme-for-credit-cards-4047254)


A logical explanation for bringing TCS on credit card under LRS is to bring parity and equity between the usage of debit cards and credit cards abroad. A gap existed till date whereby individuals would far exceed the annual limit of USD 2,50,000 since expenditures through credit cards were not accounted for under the LRS. Instances were reported where international credit cards were being issued with limits more than the present LRS limit of USD 2,50,000. Hence, the Amendment of 2023 will not only prevent such by-passing of the LRS limit but will also lead to a compliance burden on the credit card issuing companies to ensure that TCS is collected on purchases made thereto.


Authored by Srishty Jaura, Associate at Metalegal Advocates. The views are personal and do not constitute legal opinion.

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