Explained | Will all overseas spends come under the tax net? Premium

What has the Finance Ministry clarified on taxing foreign credit card spends under the Liberalised Remittance Scheme? What were the implications of the scheme and why was it under fire? What is the exemption limit set for tax collection at source?

The story so far: A proposal in the Union Budget to levy a higher tax on some types of remittances of funds abroad came into the limelight again this week after a notification was issued for its implementation from July 1. Widespread outcry from businesses and taxpayers first compelled the government to issue an elaborate explainer on the rationale for the tax levy. By the end of the week, the Finance Ministry had made a partial U-turn to quell criticism that ranged from a return to “tax terrorism” and harassment of Indians going abroad for work or leisure trips.

In the Budget for 2023-24 presented on February 1, Finance Minister Nirmala Sitharaman proposed to raise the tax collection at source (TCS) rate on overseas tour packages as well as foreign remittances under the Liberalised Remittance Scheme (LRS). Indians are allowed to remit up to $2.5 lakh a year abroad under the LRS. For overseas tour packages, the TCS rate was to be raised from 5% to 20%. Similarly, a 20% tax was proposed for all remittances under the LRS, as opposed to the extant treatment — a 5% TCS on remittances over ₹7 lakh. This did not cover remittances made for education or medical expenses abroad, which are permitted up to ₹7 lakh each annually, and already attracted a 5% TCS.

On March 24, while introducing changes to the Finance Act of 2023, Ms. Sitharaman sought to tighten this proposal further. “It has been represented that payments for foreign tours through credit cards are not being captured under the LRS and such payments escape TCS. The Reserve Bank [of India or RBI] is being requested to look into this with a view to bring credit card payments for foreign tours within the ambit of LRS and tax collection on source, thereon,” she said.

On May 16, the Finance Ministry notified the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023, to bring all credit card spends abroad under the remit of the LRS. The new notification, drafted in consultation with the RBI, omitted Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, which had kept credit cards out of the $2.5 lakh annual LRS limit as a liberalisation measure. These changes enabled the levy of a higher TCS on credit card spends overseas from July 1 this year, and the government gave an assurance that this will not impact purchases of foreign services like newspaper or streaming services subscriptions while being in India.

The 20% TCS levy on credit card spends abroad would mean any such expenses made abroad, barring for education and healthcare, would entail additional funds of the taxpayer being blocked which they could either adjust against any advance tax payments or await refunds from their income tax returns. For IT refunds, tax payers may end up waiting as long as 15 months if not more, as each assessment year’s taxes are filed in the following financial year. Several people flagged this as unnecessary harassment and blocking of funds for honest taxpayers, and questioned the need for a 20% levy if the intent was to track such spending which is likely captured by the banks issuing credit cards already. A 2% or 5% TCS would have done the tracking job as well. Concerns were also raised on employees using cards during overseas work trips, and escalating costs for those who aspire for a foreign holiday.

Reacting to sharp retorts from industry leaders, as well as citizens on social media, the Finance Ministry on Thursday issued a statement highlighting instances that have come to their notice where LRS payments are disproportionately high when compared to individuals’ disclosed incomes. It said bona fide business visits overseas by employees won’t be affected and the primary impact will be on tour travel packages, gifts to non-residents and domestic high net-worth individuals investing in assets such as real estate, bonds, stocks outside India. “Individuals remitting from their own funds are normally expected to be higher-income taxpayers,” the Ministry stressed, adding that the 20% TCS rate is “not” high. “The tax rate slab of 20% starts in the new regime for incomes over ₹12 lakh and is 30% for incomes over ₹15 lakh,” it pointed out.

These disclaimers didn’t have their intended effect. Even the government’s supporters termed this a return to “tax terrorism”, a word often used by BJP leaders to target its predecessor UPA government. By Friday evening, the Ministry did a partial volte face. Payments abroad by an individual using their international credit cards up to ₹7 lakh per financial year were exempted from the TCS levy as well as the LRS calculations, but debit cards were also included within the same limit. The Ministry’s stance was revised, it said, in a bid to remove “any procedural ambiguity” after “concerns have been raised about the applicability of TCS to small transactions under the LRS”. While this has diluted the tenor of the criticism, concerns still persist about the levy’s rationale and rate. Frequent business travellers may outrun the ₹7 lakh threshold quickly and await clarity on distinguishing personal card spends from business-related spends. Despite a rise in LRS outflows to about $24 billion in 2022-23, India’s forex reserves remain robust at about $600 billion. “Why should people pay in the first place just to claim a refund,” former Infosys Technologies’ director T. V. Mohandas Pai said. In the interest of ease of doing business, the 20% TCS needs to be replaced with a 2% levy, he argued. More clarifications may be warranted to soothe this disgruntlement.