Even because the airports have been overflowing with teeming Indian travellers heading out to offshore holidays, the Indian authorities delivered a shocker on May 16, bringing bank cards beneath the ambit of Liberalised Remittance Scheme (LRS) making them liable to be taxed, with the tax collected at supply (TCS).  It triggered a public outcry to which the federal government did bend a bit of, however some anomalies and worries stay. Let us attempt to perceive the difficulty at hand.

The fundamentals

LRS is a provision made by the Reserve Bank of India, permitting Indian residents to ship or spend as much as $250,000 in a monetary yr exterior the nation. 

TCS is a mechanism for faster tax assortment on the strains of tax deducted at supply (TDS), solely it’s a further quantity collected as tax by a vendor on particular items (on this case credit score) from the client, over and above the sale quantity. Section 206C (1G) of the Income Tax Act, 1961, permits TCS on overseas remittance via LRS.

Also Read | Do you know how the govt is taxing you?

Run-up to the brand new diktat

Presenting the Union Budget for FY24 on February 1, the Union Finance Minister, Nirmala Sitharaman, proposed to boost the TCS price on overseas remittances via LRS from 5 per cent to twenty per cent. On March 24, whereas passing the Finance Bill, 2023, she noticed that ‘payments for foreign tours through credit cards’ are usually not being captured beneath the LRS and are escaping the TCS web. RBI was requested to look into the difficulty with a view to bringing these funds beneath the LRS ambit. (RBI has, reportedly, been monitoring all worldwide transactions completed with bank cards, debit playing cards and UPI (via authorised sellers) on a month-to-month foundation, since April 2021 .)

On May 16, the Finance Ministry notified the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023, to deliver all bank card spending overseas beneath the LRS ambit. Vide this notification, the Ministry has omitted the erstwhile Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, which exempted the usage of worldwide bank cards from the LRS for funds by an individual whereas exterior India with fast impact. The omission enabled the ministry to levy 20 per cent TCS on sure spending overseas from July 1.   

Government’s rationale

Reacting to the general public outrage that ensued, the Finance Ministry got here out with a set of FAQs to elucidate its place on May 18. The major amongst these, was that LRS funds are disproportionately excessive in comparison with the disclosed incomes. It was additionally argued that the transfer will deliver parity within the tax remedy of remittances utilizing debit and bank cards whereas additionally permitting monitoring of  high-value transactions. More pertinent is the backdrop of the latest upsurge in outward remittances/world spending, which have doubled to $27 billion. 

The fear

While the federal government tried to claim that the taxpayers have the choice to reclaim the levy as adjustment towards ‘advance tax payments’ or looking for ‘refund’ whereas submitting their revenue tax returns, the persisting fear was that the excessive price of 20 per cent would successfully block the taxpayers’ funds till they’re able to entry the refund, which they will do solely within the subsequent monetary yr.

On May 19, the Finance Ministry determined to permit exemption as much as Rs 7 lakh each year on overseas remittances made with worldwide debit or bank cards, preserving the payouts exterior the LRS purview. 

However, that is no aid for prime net-worth people or excessive rating firm executives travelling overseas. It additionally locations the burden of compliance on banks, which can be blindsided about their shoppers’ payouts utilizing different playing cards and in the event that they’ve breached their permissible Rs 7 lakh restrict. 

The highway forward

Last week, Chief Economic Advisor V Anantha Nageswaran, talking at an occasion, knowledgeable that the federal government is working in the direction of linking TCS funds made by a person to the TDS from his or her revenue sources, so it doesn’t have an effect on money flows. Hope that is expedited.

For now, taxpayers have to familiarise themselves with the statutory obligation to pay relevant TCS, keep correct data of abroad bills, hold an eye fixed out for the annual data assertion (AIS) – flagging any discrepancies promptly, file the related return on revenue and, in fact, keep tax compliant.

(The author is Founder & CEO of Shree Tax Chambers)