Liberalised Remittances Scheme

Context: 

The Government in consultation with the Reserve Bank of India amended rules under the Foreign Exchange Management Act, bringing in international credit card spends outside India under the Liberalised Remittance Scheme (LRS).

About the News: 

• The use of an international credit card to make payments towards meeting expenses while overseas was so far not covered under the LRS.
• The spending by international credit cards will now attract a higher rate of Tax Collected at Source (TCS) at 20 per cent.
• Backdrop: 
  • The move comes in the backdrop of a surge in spending in overseas travel under LRS, which zoomed 104 per cent between April-February in FY23. 
  • The Finance Ministry said they have noticed that payments under the LRS were disproportionately high when compared to disclosed incomes, which indicated tax evasion and money laundering.

• Impact of the move: 
  • The rules will help bring parity between the international usage of credit and debit cards, which were already part of LRS.
  • This is expected to help track high-value overseas transactions and will not apply on the payments for purchase of foreign goods/services from India.
  • The implementation of the TCS on credit card spends abroad could potentially increase the compliance burden for issuing banks.
  • It can likely result in funds of individuals getting locked till the time actual refunds get initiated by the tax department.

Tax Collected at Source:

• TCS is a direct tax levy, which is collected by the seller of specified goods from the buyer and deposited to the government. 
• Taxpayers can then claim refunds on the TCS levy at the time of filing tax returns, which some experts pointed out could result in funds of individuals getting locked till the time actual refunds get initiated by the tax department.
• The government had already begun levying 5 per cent TCS on overseas remittances and for sale of overseas tour packages.

Liberalised Remittance Scheme:

• The Liberalised Remittance Scheme (LRS) is part of the Foreign Exchange Management Act (FEMA) 1999 which lays down the guidelines for outward remittance from India. 
• Under LRS, all resident individuals, including minors, are allowed to freely remit up to USD250,000 per financial year (April – March). 
• This can be for any permissible current or capital account transaction, or a combination of both.
• Permitted reasons for remittance under LRS:

• • Travel and tourism to foreign countries (except Nepal and Bhutan)
  • Going abroad for employment
  • Emigration
  • Maintenance of close relatives living abroad
  • Expenses in connection with medical treatment abroad
  • Paying for education abroad
  • Opening a foreign currency account abroad with a bank
  • Purchase of property abroad
  • Making foreign investments in equity shares, debt instruments, mutual funds, venture capital funds, etc.                                                                                                                                

News Source: The Hindu