Liberalized Remittance Scheme

Liberalized Remittance Scheme.

• Recently, the Finance Ministry of India, in consultation with the Reserve Bank of India (RBI), has made significant amendments to the Foreign Exchange Management Act (FEMA), bringing international credit card spending outside India under the Liberalised Remittance Scheme (LRS).
• This comes in the backdrop of a surge in spending in overseas travel. Indians spent 12.51 billion USD on overseas travel between April-February of fiscal 2022-23, a rise of 104% compared to the same period of the last year.
• The inclusion enables the levy of the higher rate of Tax Collected at Source (TCS) as announced in the Budget for 2022-23 effective from 1st July 2023.

What is LRS ?

• This is the scheme of the Reserve Bank of India, introduced in the year 2004.
• Under the 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.
• Remitted Money can be used for:
  • Expenses related to travelling (private or for business), medical treatment, study, gifts and donations, maintenance of close relatives and so on.
  • Investment in shares, debt instruments, and buy immovable properties in the overseas market.
  • Individuals can also open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the scheme.

What is FEMA 1999 ?

• The legal framework for the administration of foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999.
• Under the FEMA, which came into force with effect from 1st June 2000, all transactions involving foreign exchange have been classified either as capital or current account transactions.
• Current Account Transactions: All transactions undertaken by a resident that do not alter his / her assets or liabilities, including contingent liabilities, outside India are current account transactions. Example: payment in connection with foreign trade, expenses in connection with foreign travel, education etc.
• Capital Account Transactions: It includes those transactions which are undertaken by a resident of India such that his/her assets or liabilities outside India are altered (either increased or decreased). Example: investment in foreign securities, acquisition of immovable property outside India etc.

Key Details and Implications

• Inclusion of International Credit Card Spend in LRS:
• The amendment is expected to facilitate the monitoring of high-value overseas transactions but does not apply to payments for purchasing foreign goods/services from India.
• Previously, the usage of international credit cards for expenses during trips abroad was not covered under LRS.
• Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000, which excluded such spendings from LRS, has been omitted.
• This amendment allows international credit card transactions to be included in determining the overall LRS limit of 250,000 USD per person per financial year.

Tax Implications

• A TCS levy of 5% will be applicable on such transactions until 1stJuly 2023 (except for medical and education-linked sectors).
• After 1^st July 2023, the TCS rate will increase to 20% for credit card spends outside India.
• The new provisions will not apply on payments for ‘education’ and ‘medical’ purposes and do not impact changes in the use of international credit cards by residents while in India.
• The mechanism for levying TCS on overseas credit card spends is yet to be made functional, which poses compliance challenges for banks and financial institutions.

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