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Liberalised Remittance Scheme (LRS)

Context:

Amendments have been made to the rules under the Foreign Exchange Management Act by the government to include international credit card transactions outside of India within the purview of the Liberalised Remittance Scheme (LRS).

  • Consequently, international credit card spending will also be subject to a higher Tax Collected at Source rate of 20 percent, starting from July 1.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. Key Highlights
  2. Liberalised Remittance Scheme (LRS)
  3. Possible Impacts

Key Highlights:

Existing Mechanism:
  • Payments made using international credit cards for expenses during trips abroad were not covered under the Liberalised Remittance Scheme (LRS).
  • These expenses were excluded under Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000.
Changes Made:
  • Rule 7 has been omitted, allowing such expenses to be included under the LRS.
  • The 20% Tax Collected at Source (TCS) rule now applies to credit card transactions on international purchases, including direct bookings.
  • However, the TCS does not apply to payments for the purchase of foreign goods/services from India.
Budget 2023-24 and TCS Provisions:
  • In the Budget for 2023-24, the government made changes to the TCS limits for foreign remittances.
  • Tax Collected at Source (TCS) is a direct tax levy collected by the seller from the buyer and deposited to the government.
  • For foreign outward remittances under LRS (excluding education and medical purposes), a 20% TCS will be applicable from July 1, 2023.
  • Previously, a 5% TCS was applicable for foreign outward remittances above Rs 7 lakh, and a 5% TCS without any threshold applied to overseas tour packages.

Liberalised Remittance Scheme (LRS):

Introduction and Eligibility:
  • The Reserve Bank of India introduced the Liberalised Remittance Scheme in 2004.
  • The scheme allows resident individuals, including minors, to freely remit up to USD 2,50,000 per financial year for permissible current or capital account transactions.
  • Corporations, partnership firms, Hindu Undivided Family (HUF), trusts, etc., are not eligible for the scheme.
Remittance Limit and Frequency:
  • There are no restrictions on the frequency of remittances under LRS.
  • Once an individual has remitted up to USD 2,50,000 during the financial year, they cannot make any further remittances under the scheme.
Permissible Usage of Remitted Money:
  • Remittances can be used for various purposes, including travel expenses (personal or business), medical treatment, education, gifts and donations, maintenance of close relatives, etc.
  • Funds can be invested in shares, debt instruments, and immovable properties in overseas markets.
  • Individuals can open and maintain foreign currency accounts with banks outside India for transactions allowed under the scheme.
Prohibited Transactions:
  • Transactions specifically prohibited under Schedule-I or restricted under Schedule-II of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 are not allowed.
  • Trading in foreign exchange abroad is prohibited.
  • Capital account remittances to countries identified as “non-cooperative countries and territories” by the Financial Action Task Force (FATF) are not permitted.
  • Remittances to individuals and entities identified as posing a significant risk of terrorism, as advised by the Reserve Bank, are also prohibited.
Requirements:
  • Resident individuals must provide their Permanent Account Number (PAN) for all transactions under LRS conducted through Authorized Persons.

Possible Impacts:

Tedious Task for Banks:

  • Banks will face a challenging task of monitoring and keeping track of each transaction to ensure compliance with the 20% Tax Collected at Source (TCS) rule.

Transactions Outside TCS Purview:

  • Transactions for education and medical expenses, among others, remain exempt from the higher 20% TCS, creating complexity in tracking and applying the tax.

Increased Cost of Foreign Travel:

  • Foreign travel expenses will become 20% more expensive due to the blocked amount that will be refunded through the income tax process.

Refunds and Income Tax Filing:

  • Taxpayers will have the option to claim the 20% TCS back while filing their Income Tax Returns (ITR). However, this process adds an additional step and time before the amount is refunded.

Widening Pricing Gap:

  • The introduction of a 5% TCS on LRS remittances in 2020 already caused a significant loss of business for domestic travel and tour agents.
  • Global Travel Agents (GTAs) that evade TCS compliance can offer better pricing on their platforms, creating a pricing gap.
  • The four-fold increase in the tax rate further widens the pricing gap, making upfront costs for travelers even higher when booking with domestic travel agents.

-Source: Indian Express


February 2024
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