Liberalised Remittance Scheme Funds [UPSC Notes]

The Centre has amended rules under FEMA to bring international credit card spends outside India under the LRS.

• Resident individuals, including minors, are permitted to send up to US $2,50,000 (approximately Rs 2.06 crore) overseas per year through the Liberalised Remittance Scheme (LRS) without requiring prior approval from the RBI.

Background and Key Changes:

• Previously, credit card transactions were excluded from LRS by Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000.
  • Rule 7 has been omitted with the new notification.

New amendments:

• The recent amendments made by the Centre under FEMA include bringing international credit card expenditures outside India under the purview of the Liberalised Remittance Scheme (LRS). 
• Starting from July 1, there will be a higher rate of Tax Collected at Source (TCS) at 20% for spending on international credit cards. 
  • However, until June 30, a TCS rate of 5% applies to overseas tour packages or any other category, excluding medical and education expenses. 
• It’s important to note that these changes do not affect payments made for purchasing foreign goods or services from India.

Why were the new amendments introduced?

• The amendments aim to promote fairness, transparency, and effective management of foreign exchange transactions while preventing misuse and ensuring compliance with disclosure requirements.
• Parity between credit and debit cards: 
  • The amendment was made to bring parity between the international usage of credit and debit cards. 
  • Debit cards were already included in the Liberalised Remittance Scheme (LRS), which allows individuals to remit a certain amount abroad without prior approval. 
  • By including credit card spends under LRS, the rules aim to create a consistent framework for both types of cards.
• Disproportionately high LRS payments: 
  • Instances were noticed where LRS payments were significantly higher than the disclosed incomes of individuals. 
    • This suggests potential discrepancies and raises concerns about tax evasion or undisclosed sources of income.
    • The rule tweak aims to address this issue by capturing and regulating the total expenditures under LRS more effectively.
• Exclusion of business visits with employer-covered costs:
  • LRS does not cover business visits of employees when the expenses are borne by the employer.
  • This exclusion helps distinguish between personal expenditures and business-related transactions, ensuring that the LRS limits are used for individual purposes rather than for corporate expenses.

Impact:

• The changes may impose a significant compliance burden on card-issuing banks and consumers.
• The TCS rate of 20% for international credit card spending may be perceived as high, leading to potential challenges and financial burdens.
• Determining whether an employee’s overseas travel expenses are business-related or not may pose practical challenges.
• Refunds for TCS levy can be claimed during tax return filing but may result in funds being locked until the refund is initiated.

What is Tax Collected at Source (TCS)?

• Tax Collected at Source (TCS) is an income tax that the seller of specific items must collect from the customer.
• A person selling a certain item is required by the TCS idea to collect tax from a customer at a set rate and deposit the money with the government.