Travel and Investment to Attract Higher Rate of TCS

Tax Collected at Source (TCS) for Foreign Remittances made under the Liberalised Remittance Scheme (LRS)

Tax Collected at Source (TCS) is a tax payable by a seller but, which is collected from the buyer at the time of sale of goods. Let us understand this tax with the help of an example:

If a buyer is purchasing a car that costs Rs. 15 lakhs, then an amount of Rs. 15,000/- would be payable as TCS on such purchase which is required to be submitted to the designated banks. The person who is selling those cars is only responsible for collecting such amount from the buyer and subsequently pay it to the credit of the government.

Here, it can be seen that seller is just acting as a middleman between the buyer and the government and he himself is not obligated for such payment of tax.

Who is a Seller and Buyer under Tax Collected at Source (TCS)

Goods & Transactions covered under TCS Provisions

The Income Tax Act of 1961, Section 206C, mandates the collection of Tax at Source (TCS) from every person who is a seller at the time of debiting the amount due by the buyer or while receiving such amount from the buyer, on account of the remittances listed below.

Only remittances covered by the Liberalised Remittance Scheme are subject to TCS.

Understanding the Concept of Liberalised Remittance Scheme

1. What is the Liberalised Remittance Scheme (LRS) of USD 2,50,000?
   Under the Liberalised Remittance Scheme, all the 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 the purposes mentioned in Para 1 of Schedule III of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
2. What are the purposes under the FEMA Rules, for which a resident individual can avail of foreign exchange facility?
   Individuals can avail of foreign exchange facility within the LRS limit of USD 2,50,000 on financial year basis, for the following purposes:
   • 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, or attending a conference or specialized training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as 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 which is not covered under the definition of current account in FEMA 1999.
3. What are the prohibited items under the Scheme?
   The remittance facility under LRS is not available for the following:
   • Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, prescribed 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
   • Gifting by a resident to another resident, in foreign currency, for the credit of the latter’s foreign currency account held abroad under LRS.

Collection of Tax at Source (TCS) on Remittances made under Liberalised Remittance Scheme (LRS)

With the Finance Act of 2023, there has been a significant change to the provisions of Section 206C of the Income Tax Act of 1961, whereby now anyone purchasing an overseas tour package or making any remittances in the form of gifts, donations etc., under the Liberalised Remittance Scheme will be costlier due to the increase in the rate of TCS:

• No changes/ amendments have been made in the provisions of remittances made for the purposes of medical treatment or education.
• Any remittances made for the purposes of medical treatment in excess of Rs. 7 lakhs during any previous year would be liable to TCS @ 5%
• Any remittances made for the purposes of education in excess of Rs. 7 lakhs during any previous year would be liable to TCS @ 5% and if such amount is made out of loan so obtained from any financial institution, then TCS would be collected @ 0.5%.

Recent Amendments in the Provisions of TCS/ LRS and its Probable Impacts

• The Government of India with Finance Act, 2023, has increased the rate of tax collected at source from existing 5% to 20%, on overseas tour packages and any remittances made under the Liberalised Remittance Scheme (LRS). The said amendments would be effective from July 01, 2023. This increase in the rate of TCS would be making foreign trip much costlier, considering the higher amount of taxes required to paid by any purchaser of overseas tour packages or where any remittances are being made under the Liberalised Remittance Scheme (LRS).
• Rule 7 of the Foreign Exchange Management (Current Account Transactions Rules), 2000 exempts any payments made by using International Credit Card by a person towards meeting expenses while such person is on a visit outside India. Now, with Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023 rule 7 of the said rules has been omitted.
• This omission of rule 7 under the FEM (Current Account Transactions Rules), 20001, had now brought the credit card transactions as well under the ambit of Liberalised Remittance Scheme (LRS). Now, any person spending money overseas including credit card transactions needs to be mindful of the overall limit of LRS i.e., USD 2, 50, 000.
• The authority has also, clarified vide a Press Release2 dated: 19th May, 2023, that any payments made by an individual using their international Debit or Credit cards up to Rs. 7 lakhs per financial year will be excluded from the LRS limits and hence, will not attract any TCS.

Foot Notes:

1. Amendment G.S.R. 369(E), dated: 16th May, 2023
2. Clarification Press Information Bureau (pib.gov.in)

Disclaimer

The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. The content of this article is not intended to create and receipt of it does not constitute any relationship. Readers should not act upon this information without seeking professional legal counsel.