The Ministry of Finance on Thursday clarified the changes brought into the FEMA rules, which brings overseas international credit card spending under RBI’s liberalised remittance scheme (LRS) after the topic remained trending on Twitter whole day. In a series of tweets, the ministry said that since credit card spending overseas has now been brought under LRS, such remittances would be liable to tax collected at source (TCS) at applicable rates.
However, it clarified that the new rules do not affect any changes in the use of international credit cards by residents while in India.
The Ministry of Finance on May 16, 2023, through a notification announced that International Credit Cards (ICC) used for spending outside of India will be put under the aegis of the Liberalised Remittance Scheme (LRS), which will cause such cards to attract a higher tax collected at source (TCS) at 20 per cent. The change was announced during the Budget 2023-24. The government had announced to hike TCS rates to 20 per cent, from the current 5 per cent, on overseas tour packages and funds remitted under LRS (other than for education and medical purposes). The new TCS rates will come into effect from July 1, 2023.
This announcement raised heckles among Twitter users. Twitterati were captivated by the announcement of a 20 per cent tax collection at source (TCS) on international credit card spending, making it the most popular trending topic on the platform on Thursday.
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The finance ministry said, “The notification dated May 16 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 ministry in a list of FAQs (frequently asked questions) detailing the reasons for the inclusion of foreign spending using credit cards. It said that instances came to notice of the tax authorities that remittances under LRS by some individuals were disproportionately high to their disclosed sources of income.
A person on an overseas visit can use international debit cards, international credit cards, or other methods for undertaking current account transactions. Although the payments by debit cards were covered under the LRS, expenditures through credit cards were not accounted for under the specified LRS limit, which has led to some individuals exceeding the LRS limits, the ministry said.
This exemption to international credit cards was provided under erstwhile Rule 7 of FEMA Rules.
Data collected from top money remitters under LRS also revealed that international credit cards were being issued with limits in excess of the present LRS limit of $2.50 lakh.
The ministry further said that the Reserve Bank of India too had on numerous occasions written to the government pointing to the need to remove the differential treatment to debit and credit card spendings.
“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,” the ministry said.
Under the RBI’s LRS scheme, an individual can remit up to $2.5 lakh annually overseas without the approval of the RBI. Remittances beyond $2.5 lakh or its equivalent in foreign currency would require approval from the RBI.
Remittances under the Liberalised Remittance Scheme (LRS) witnessed a significant increase in recent years. According to PTI, the total remittance amount surged from $12.68 billion in 2020-21 to $19.61 billion in 2021-22. Furthermore, in 2022-23, the remittance amount exceeded $24 billion, with overseas travel contributing to over half of the total remitted funds.
According to the FAQ, there is specific tax collection at source (TCS) rates applicable to different types of expenses. Medical treatment and education expenses exceeding Rs 7 lakh will attract a TCS rate of 5 percent. On the other hand, expenses related to real estate investment, foreign tours, and travel will be subject to a higher TCS rate of 20 percent.
However, individuals availing loans for overseas education will be subjected to a lower TCS rate of 0.5 percent, applicable above the Rs 7-lakh threshold.
The ministry emphasized that the higher TCS rate primarily impacts investments in assets like real estate, bonds, and stocks outside India by high net worth individuals (HNI), as well as tour travel packages or gifts to non-residents.
“If the TCS is of a person not being a taxpayer, then the 20 per cent rate on such presumed income is not high. The tax rate slab of 20 per cent starts in the new regime for incomes over Rs 12 lacs and is 30 per cent for incomes over Rs 15 lacs,” the ministry said.
The ministry also clarified that LRS does not cover the business visits of an employee.
When an employee is being deputed by an entity, such expenses will be treated as residual current account transactions outside LRS and may be permitted by the AD without any limit, subject to verifying the bona fide of the transaction, it said.