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20 Jun2023
  • By Authored by CA Rahul Pareva
  • Category Income Tax
  • Views 197

In a move to bolster the financial independence of Indian residents, the Liberalized Remittance Scheme (LRS) has undergone significant changes and received much-needed clarification.

The LRS, launched by the Reserve Bank of India, allows individuals to transfer money abroad for travel, education, and investments.

The recent amendments aim to streamline and enhance the scope of the scheme, providing greater flexibility and convenience to individuals seeking to expand their financial horizons beyond national borders.

This article delves into the revised LRS scheme and highlights the key updates and clarifications that can empower Indian residents to explore global opportunities.

How and Why Credit Card Come under LRS

Credit cards are subject to the Liberalized Remittance Scheme due to the nature of their usage and associated financial transactions. LRS is a regulatory framework established by the Reserve Bank of India (RBI) that governs the movement of funds outside of India.

Since credit cards enable individuals to make international transactions and potentially transfer funds abroad, they fall within the purview of LRS regulations. By including credit cards under LRS, the RBI aims to monitor and regulate cross-border financial flows to ensure compliance with foreign exchange management laws and maintain economic stability.

Changes in the Taxation of Outbound Remittances

The Hon'ble Finance Minister has in the recent finance budget has amended the applicable rate of Tax Collection at Source (TCS) on transactions covered under the liberalized Remittance Scheme (LRS) foreign remittances.

The changes announced in the budget 2023 are applicable from July 01, 2023, I.e. the tax rate on foreign remittances will surge from 5% to 20% of the transaction amount. This increase aims to specifically target affluent individuals who have been known to evade taxes, thereby promoting a more equitable tax system.

Although exceptions exist for educational and medical expenses, the new tax rate will apply to funds exceeding INR 700,000 per financial year, including those intended for vacations, investments, and gifts.

Here is the table summarizing the revised tax rates for outbound remittances starting July 1, 2023:

Type of Remittance Current Rate of TCS Proposed Rate of TCS
For the purpose of education (education loan from any financial institution) 0.5% of the amount or the aggregate of the amounts in excess of Rs 7 Lakh No Change
For the purpose of education (education loan from other financial institution)
 
5% of the amount or the aggregate of the amounts in excess of Rs. 7 Lakh No Change
Remittance is for Medical Treatment 5% of the amount or the aggregate of the amounts in excess of Rs. 7 Lakh No Change
Overseas Tour Package 5% without any threshold limit 20% without any threshold limit
Any other case 5% of the amount or the aggregate of the amounts in excess of Rs. 7 Lakh 20% without threshold

Exemptions to the Tax Increase

Following public backlash and concerns surrounding the implementation of a 20% Tax Collection at Source (TCS) on credit card spending outside India, the Ministry of Finance has provided clarification.

In a statement issued on May 19, 2023, the ministry addressed concerns about the applicability of TCS to small transactions under the Liberalized Remittance Scheme (LRS) from July 1, 2023.

It was announced that payments made with foreign debit or credit cards up to Rs 7 lakh per financial year would not count toward the LRS limits and will not be subjected to TCS.

This clarification aims to alleviate procedural ambiguities and ensure smoother transactions for individuals.

Impact and Motivation of the Changes

Financial experts see the recent tax increase on outbound remittances to ensure high-net-worth individuals (HNIs) contribute their fair share before permanently leaving India.

Over the past five years, about 30,000 to 35,000 HNIs have moved to places like the US, UK, UAE, Canada, Australia, Singapore, and Europe.

Notably, in 2022 alone, around 8,000 HNIs made the decision to relocate. The tax adjustment aims to address potential tax evasion concerns associated with such migrations.

LRS Scheme Basics

The Liberalized Remittance Scheme (LRS) is an initiative put in place by the Reserve Bank of India to make it easier for people living in India to send money to other countries.

Under the LRS, individuals are permitted to remit up to US $250,000 per financial year (April to March) for various current or capital account transactions or a combination of both, providing greater flexibility and ease in conducting international transactions.

Under the LRS scheme, residents must give their PAN (Permanent Account Number) for all transactions done through authorised people.

One important aspect of the LRS scheme is that remittances can be made in any freely convertible foreign currency, and it is not obligatory for the transactions to be carried out specifically in US Dollars.

Prohibited Transactions under LRS

Under the Liberalized Remittance Scheme (LRS), the following types of transactions are expressly prohibited:

* Transactions that are not permissible under the Foreign Exchange Management Act 1999.

* Remittance for margins or margin calls to overseas exchanges or overseas counterparties.

* Remittances for any purpose specifically prohibited under Schedule I or any item restricted under Schedule II of the Foreign Exchange Management (Current Account Transaction) Rules, 2000.

* Capital account remittances to countries identified by the Financial Action Task Force (FATF) as non-cooperative countries and territories or as notified by the Reserve Bank of India (RBI).

* Remittances directly or indirectly to individuals and entities identified as posing a significant risk of committing acts of terrorism, as separately advised by the RBI to the banks

Types of Account Transactions are Allowed Under the LRS

The Liberalized Remittance Scheme (LRS) allows for several current account transactions, including:

* Private visits (excluding Nepal and Bhutan)

Gifts or donations

* Emigration

* Overseas business trips

* Medical treatment abroad

* Pursuing studies outside of India

* Going abroad for employment

Maintenance of close relatives abroad
 

Under the LRS, it is important to remember that the total amount of current account transfers that are allowed is capped at $250,000.

Summing Up

The Liberalized Remittance Scheme (LRS) serves as a vital framework introduced by the Reserve Bank of India to enable resident individuals to transfer funds abroad for various permissible current account transactions.

While the LRS facilitates a wide range of transactions, adhering to the prescribed limits and guidelines is important. The proposed implementation of a 20% Tax Collection at Source (TCS) on LRS transactions, effective from July 1, 2023, is expected to significantly impact the economy. The full extent of its consequences will be realized once it comes into effect.

Therefore, individuals falling under the categories mentioned earlier should ensure compliance with the new regulations and fulfill their tax obligations accordingly. Stay informed and prepared for these forthcoming changes to navigate the LRS framework effectively.

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