Context: As per the Union budget declarations this year, union government is going to impose 20 per cent tax at source on foreign remittances. For this, Reserve Bank of India is going to monitor credit card usage for foreign travel purpose.
Background
- Liberalized Remittance Scheme do not cover payments for foreign tours through credit card and such payments escape tax collection at source.
- The Union Budget 2023 proposed a TCS for foreign outward remittance under LRS other than for Education and medical purposes of 20 per cent applicable from July 1, 2023. Before this proposal, the TCS of 5 per cent was applicable on foreign outward remittances above ₹ 7 lakh.
- Tax Collected at Source (TCS) is an income tax, collected by the seller of specified goods, from the buyer. TCS is a concept where a person selling specific items is liable to collect tax from a buyer at a prescribed rate and deposit the same with the government.
What is the Liberalised Remittance Scheme (LRS)
- Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both.
- Further, resident individuals can avail of foreign exchange facility for various purposes ( such as private, gift, donation, employment, travel, studies) within the limit of USD 2,50,000 only.
- The Scheme was introduced on February 4, 2004, with a limit of USD 25,000 (extended regularly).
- In case of remitter being a minor, the LRS declaration form must be countersigned by the minor’s natural guardian.
- Remittances under the LRS facility can be consolidated (clubbed together) in respect of close family members subject to the individual family members complying with the terms and conditions of the Scheme.
- There is no restrictions on the number of transactions but cumulative amount should not exceed 2.5 lakh dollar.
- The remittances can be made in any freely convertible foreign currency (apart from dollars).
- Only certain capital account transactions are allowed under LRS rules such as opening a bank account abroad i.e. a Foreign Currency Account, purchasing real estate property overseas, for making investments overseas which includes investing in shares, mutual funds, and debt instruments amongst others.
- The Scheme is not available to corporates, partnership firms, HUF, Trusts etc.
Following are not permitted under the scheme
- Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, proscribed magazines, etc.) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
- Remittance from India for margins or margin calls to overseas exchanges / overseas counterparty.
- Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market.
- Remittance for trading in foreign exchange abroad.
- Capital account remittances, directly or indirectly, to countries identified by the Financial Action Task Force (FATF) as “non- cooperative countries and territories”, from time to time.
- Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.
