FEMA Change Will Bring Overseas Credit Card Spending Under RBI's LRS
The purpose of bringing global credit card spending under LRS is to bring in parity in tax treatment of remittances using debit and credit cards and to curb ever-increasing global spending by visitors
The Ministry of Finance (MoF) has made a change into the Foreign Exchange Management Act (FEMA) rules through a notification dated May 16, 2023. According to notification, the Ministry of Finance in consultation with the RBI has omitted Rule 7 of FEM (CAT) Rules 2000. It has removed the relaxation given to the users of international credit cards for their transactions by a person when they are on overseas visit. The change brings overseas international credit card spending under the liberalised remittance scheme (LRS) of the RBI. The LRS is an RBI measure that allows Indian residents to spend up to $2.50 lakh per financial year outside India without any prior approval of RBI.
The purpose of bringing overseas credit card spending under LRS is to bring in parity in tax treatment of remittances using debit and credit cards and to curb ever-increasing global spending by Indian overseas visitors. According to ABP Live, the global spending by Indian overseas visitors rose from $12.68 billion in 2020-21 to $19.61 billion in 2021-22 and further increased to $24 billion in 2022-23.
The government announced that all international credit card spending outside of India will be a part of LRS, which will attract a higher tax collected at source at 20 per cent. This change would have significant implications for visitors who frequently visit abroad and make international transactions during their visits. This step was opposed by the people. Therefore, the ministry came out a day after changing the rule with a list of frequently asked questions (FAQs) detailing the rationale for bringing international credit cards under the liberalised remittance scheme.
A person can use international debit cards, international credit cards and other means for undertaking current account transactions during his or her overseas visit. Earlier, international credit card holders were enjoying the exemption from TCS under erstwhile rule 7 of FEMA. However, the payment by international debit cards, forex cards and bank transfers were included in the LRS. Moreover, all transactions undertaken on international credit cards in India were subject to Rule 5 of the FEM (CAT) Rules 2000 and covered under LRS.
Despite the FAQs, the notification stemmed gave rise to a hubbub on social media. The issue remained trending on social media around the announcement. It was the most trending issue on Twitter on May 18. Disquiet was expressed by the people about the applicability of TCS to small transactions under the LRS from July, 2023. Therefore, the government, which in the first stance refused to eat its words, today said no TCS will be collected on small transactions up to Rs 7 lakh to avoid any procedural ambiguity.
Now, any payment made by an individual using their international debit card and credit card of up to Rs 7 lakh per financial year will be exempted from the LRS limits and ergo will not attract any TCS. However, transactions on overseas trips of more than Rs 7 lakh will be the part of LRS. The exemption from TCS has been permitted only for overseas spending through international debit and credit cards. However, this relaxation shall not be applicable for any payment made from India. The government will issue necessary changes to the rules in FEMA, separately.
The government claims the decision was taken in consultation with the RBI and notified on May 16, 2023. The new tax rate will come into effect from July 1, 2023. The RBI had also written to the government on numerous occasions on the same line and asked to remove the differential treatment for international debit card and credit card spendings in the interest of uniformity and equality in the treatment of modes of withdrawal of foreign exchange and for capturing total expenditure under LRS.
What is the present TCS Rate?
Earlier, TCS rate was 5 per cent, however, according to the Budget Speech of the Finance Minister for 2023, the government has proposed to hike the TCS rate to 20 percent on purchase of overseas tour programmes and funds remitted under LRS in the budget for the financial year 2023-24. However, the rate of TCS for foreign remittances for education and for medical treatment is 5 per cent for remittances in excess of Rs 7 lakh.
Why TCS?
The government is arguing that they are establishing equality between international credit card users, international debit cards users, forex users and bank transferers. According to the ministry, TCS is an important step towards a transparent and egalitarian payment landscape. It has been noticed by the tax authorities that remittances under LRS by some individuals were disproportionately high compared to their disclosed sources of income.
In this backdrop, the government has come out with a series of tweets and videos from the twitter handle @mygovindia for knowing about TCS and LRS and to get the complete overview of how it may or may not impact users. The government said the change in rule will prevent money laundering and it will enable tracking high value overseas transactions.
However, the change will not apply to payments made for transactions of foreign goods and services from India. Simultaneously, TCS will get adjusted as smoothly as others, says Finance Secretary TV Somanathan. A taxpayer can claim it while filing an income tax return (ITR). It is not applicable to payments less than Rs 7 lakh, business trips, payment for purchase of foreign goods and services from India, and payment for education and medical purposes.
How will it affect the public?
Experts are of the view that the new rule will not only impose compliance burden on card issuing banks, it will impose procedural burden on consumers too due to more than Rs 7 lakh on overseas trip. According to LiveMint, individuals may witness a higher bill on their credit cards. Even TCS is refundable, but, according to Archit Gupta, Founder and CEO, Clear Tax, blocking money for several months until either returns are filed or refunds are claimed and taxes already collected are adjusted.
The government originally intended to bring parity in tax treatment of remittances while using international credit cards, international debit cards, and forex cards. But the truth is something different. From July 2023 all Indian overseas visitors are going to encounter high-cost foreign transactions and an additional financial liability while making payments more than Rs 7 lakh for overseas travel that may increase the overall expenses of the tour.
It is suggested that foreign visitors now need to carefully plan their foreign remittances during foreign visits to ensure compliance with the regulations without breaching any norms. The new change would also impact bank and credit card issuing institutions; at the moment, they must adapt their modus operandi to integrate data and facilitate ease of filing income tax returns.
Vinay K Srivastava teaches finance at I.T.S Ghaziabad.
[Disclaimer: The opinions, beliefs, and views expressed by the various authors and forum participants on this website are personal and do not reflect the opinions, beliefs, and views of ABP News Network Pvt Ltd.]
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