The Central Government has changed the Foreign Exchange Management Act guidelines to include credit card spending outside of India under the Liberalised Remittance Scheme (LRS).
As a result, from July 1, such credit card transactions will be subject to a 20% tax collected at source (TCS).
The amendment was implemented this week by the Central Government, in coordination with the Reserve Bank of India, via a notification.
In Budget 2023-24, the government increased the TCS on LRS expenses to 20% without a threshold, excluding education and medical care. LRS currently has a limit of $250,000 (about 2 crore), and any remittance beyond this amount requires authorisation from the Reserve Bank of India (RBI).
“As a result of this notification, payments made with international credit cards outside of India will be covered by the LRS scheme.” This essentially indicates that credit card spending outside of India will be included in the overall cap of $250,000. This is regardless of whether such expenditures are for personal or business objectives, and there is a corresponding TCS impact.
Individuals who spend a lot of money on international transactions will now have to carefully plan their foreign remittances to ensure compliance with the rules and avoid any violations of norms.
While the foregoing may not apply to most people, the new law states that any credit card purchase made outside of the country will now be subject to a 20% TCS if it is not for the purpose of education or medical treatment.
Previously, the usage of international credit cards for expenses made while travelling overseas was not considered part of the LRS. “In order to apply TCS on foreign remittances and foreign spends under LRS, an amendment to Section 206C(1G) of the Income Tax Act was proposed, proposing TCS @20% on remittances for foreign spends.” Payment for these foreign expenditures could also be made via international credit cards, which were not subject to RBI scrutiny under Rule 7 of the FEMA Rules 2000,” says Vivek Jalan, partner at Tax Connect Advisory.
Rule 7 of the FEMA (Foreign Exchange Management Act) Rules 2000 prohibits a person resident outside India from transacting in foreign exchange, foreign securities, or immovable property.
“The finance minister, while answering in Parliament, asked the RBI to find out ways by which this could also be tracked by deleting this Rule 7 of FEMA (Current Account Transaction) Rules 2000 all foreign spends even by international credit cards will also be liable to TCS @20%,” Jalan said.
Yes, international purchases made using debit cards, foreign currency, and forex cards are covered under the Reserve Bank of India’s LRS, which allows Indian residents to remit up to $250,000 overseas per fiscal year without prior clearance. International credit card spending will be subject to LRS beginning May 16, 2023.
LRS allows you to spend money in foreign nations for education, the purchase of assets such as stocks and real estate, tourism, medical treatment, and other purposes. You can also spend for the upkeep of distant relatives, presents, and donations.
According to international tax expert TP Ostwal, the proposal to levy a 20% tax collected at source (TCS) on credit card purchases for overseas transactions, as well as the inclusion of credit card transactions in tax categories, will have an impact on average consumers, not only the wealthy.
The Liberalised Remittance Scheme (LRS) is a provision of the Foreign Exchange Management Act (FEMA) of 1999 that governs outward remittances from India. All resident individuals, including children, are permitted to freely remit up to USD250,000 every fiscal year (April – March) under LRS.
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