Impact of Tax Collection at Source on the Withdrawal of International Credit Card from Exemption of LRS

[Devan Gupta]

The Ministry of Finance, Department of Economics Affairs has issued a notification dated 16.05.2023 to amend FEMA Rules, 2000 and Clarification on LRS

The rules shall be named as FEMA (Amendment) Rules 2023. Under this notification, the Ministry of Finance has withdrawn Rule 7 of the FEMA 2000.

Rule 7 of FEMA Rules, 2000 - Use of International Credit Card while Outside India

Nothing contained in rule 5 shall apply to the use of an International Credit Card for making payment by a person towards meeting expenses while such person is on a visit outside India.

Rule 5 – Prior approval of Reserve Bank

Every drawal of foreign exchange for transactions included in Schedule III shall be governed as provided therein

Provided that this rule shall not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) Account of the remitter.

Rule 2(b) defines the term “Drawal” means as follows:

“drawal of foreign exchange from an authorized person and includes the opening of a Letter of Credit or use of an International Credit Card or International Debit Card or ATM Card or any other thing by whatever name called which has the effect of creating foreign exchange liability”

In perusal of the above, Prior to the Notification dated 16.05.2023, it was not necessary to seek prior permission from the RBI before using an International Credit Card to pay for expenditures while visiting another country as per Rules 5 and 7 of the FEMA Rules.

However, the Central Government has removed Rule 7 of the FEMA vide notification No. 1/5/2023-EM dated 16.05.2023, Indian people must take prior permission from the Reserve Bank of India in order to use International Cards while traveling outside of India.

Therefore, Indians who are considering traveling overseas to make a visit must obtain permission in advance from the Reserve Bank of India (referred to as RBI) in order to use their International Credit Cards to pay for their expenses. Accordingly, International Credit Card is also a part of Liberalized Remittance Scheme (referred as to the “LRS Scheme”). International Credit card spending in foreign currency is also included under LRS Scheme.

In this article, we will explore the implications and consequences of the LRS scheme on international credit card usage by Indian residents after the amendment of Rule 7 under FEMA Rules.

The LRS scheme allows eligible individuals to remit a certain amount of money outside India for specific purposes, such as education, travel, medical treatment, investment in overseas assets, and more which are defined under Schedule III of the FEMA Rules 2000. As per the current regulations, an individual can remit up to $250,000 per financial year under the LRS scheme. The LRS Scheme is only restricted to Individuals and is not applicable to corporates, Partnership firms, LLP, HUF, etc.

Schedule III read with Rule 5 of the FEMA Rule - Facilities for individuals

Individuals can avail of foreign exchange facilities for the following purposes within the limit of USD 2,50,000 only. Any additional remittance in excess of the said limit for the following purposes shall require prior approval of the Reserve Bank of India:

• Private visits to any country (except Nepal and Bhutan)
• Gift or donation
• Going abroad for employment
• Emigration
• Maintenance of close relatives abroad
• Travel for business, attending a conference or specialized training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as an attendant to a patient going abroad for medical treatment/ check-up.
• Expenses in connection with medical treatment abroad
• Studies abroad
• Any other current account transaction

Further, the Ministry of Finance department released a FAQ dated 18.05.2023 with respect to the Tax Collection at Source (TCS) on Foreign remittance through the LRS Scheme. The ministry has released said FAQ in two parts Part A provides clarification on the Tax Collection at source and Part B provides clarification on the LRS Scheme.

The consequence of the recent amendment in section 206 C of 1G of the Income Tax (Amendment) Act, 2023, wherein the rate of the Tax deduction at source has been changed from 5 % to 20% on particular subject entities with effect from 1^st ­July 2023.

Accordingly, Section 206 C of (1G) of the Income Tax Act, 1961 (Amended 2023) has been iterated below:

­Section 206C (1G) - Every person:

1. being an authorized dealer, who receives an amount, for remittance out of India from a buyer, being a person remitting such amount under the Liberalised Remittance Scheme of the Reserve Bank of India;
2. being a seller of an overseas tour program package, who receives any amount from a buyer, being the person who purchases a such package,

shall, at the time of debiting the amount payable by the buyer or at the time of receipt of such amount from the said buyer, by any mode, whichever is earlier, collect from the buyer, a sum equal to twenty percent of such amount as income-tax

Accordingly, it has been noted that before the amendment of the Income Tax Act 2023, the amount of TCS rate on such transactions attracts 5% and now it change to 20% in the Income Tax Act with effect from 1^st July 2023.

Therefore, the consequence of the recent amendment which increases the rate shall be applicable to the amount of selling of overseas tour packages and foreign remittance through the Liberalized Remittance Scheme with some exemptions which come into force from July 1^st, 2023.

Impact of Liberalised Remittance Scheme (LRS) on International Credit Card

In consultation with the Reserve Bank of India, the Central Government included International Credit Card transactions into the LRS through an amendment that will affect travelers planning for a trip abroad and who use credit cards for transactions.

Part B provides clarification regarding the applicability of TCS to debit/ credit transactions under LRS.

The Ministry explained that Rule 7 of the Foreign Exchange Management (Current Account) Transaction Rules, 2000 was omitted from the notification dated May 16, 2023. It effectively eliminates the exception for using a foreign credit card to pay for expenses incurred while traveling. Prior to LRS, Rule 5 of the FEMA Rules applied to all current account transactions made with an overseas credit card in India. Additionally, it was made clear that the notification from May 16, 2023, had no impact on foreign credit cards being used by foreign nationals while using domestically.

The ministry clarified the need for notice and added that when visiting overseas, a person may conduct current account transactions using international debit cards, alternative means, or foreign credit cards. Debit card payments and other forms of payment have long been considered LRS. Any payments by an individual using their international Debit or Credit cards upto Rs 7 lakh per financial year will be excluded from the LRS limits. Hence, it will not attract any TCS upto the said limit.

Example

Let’s suppose you want to book a family tour package to Thailand cost of USD 2 lakh. Now, if you use your credit card to purchase the package, you will have to spend an additional USD 40,000. Remember, all other payment methods such as transferring money from one bank to another or payments through debit cards for the overseas trip are already under LRS, and TCS of 40,000 will also be applicable there.

Devan Gupta Comments:-

The notification was made in order to avoid treating debit cards and credit cards differently and to promote equity and uniformity in the treatment of foreign exchange withdrawal methods to capture total LRS expenditures for responsible foreign exchange management, and to prevent exceeding LRS limits. The Reserve Bank of India emphasized the need to end this discriminatory treatment.

However, the expenses of employees traveling on business are not covered by the LRS.  Such expenses shall be classified as residual current account transactions outside LRS and may be approved by the AD without any restrictions, subject to the AD confirming the bona fide of the transaction. This applies when an employee is deputed by an entity for any of these and the expenses are covered by the latter. The LRS has been a crucial policy implemented by the RBI to regulate and monitor the outward remittances made by Indian residents. This scheme significantly impacts various financial transactions, including the usage of international credit cards.

Now, an individual is required to be alert while using an International Credit card for foreign remittance purposes but this limit is extended to 7 lakh per financial year for an individual using their International credit or debit card.

In simple words, it just blocks a chunk of cash that too will be available on tax returns. The government of India is now going a bit harsh towards the taxation part.