Banks are preparing their systems to track spending on international cards and collect the tax collected at source (TCS) on outward remittances. The RBI has announced a 20% tax on the liberalised remittances scheme which will come into force on July 1. Due to multiple rules and exemptions, banks have been struggling to incorporate them into their systems while deducting TCS. Initially, there was confusion among banks regarding an exemption of up to Rs 7 lakh, but after the government provided sufficient time to address the issue, banks’ systems for reporting international card spending are now ready.
Previously, banks faced difficulties in assessing and collecting TCS on exemptions when using credit and debit cards outside India. The RBI left the responsibility on the banks to collect the tax imposed by the government in the FY23-24 budget.
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New provisions have been introduced in the LRS scheme to control the increase in outward remittances from the country. The government amended the rules under the Foreign Exchange Management Act and included international credit card spending outside India under the LRS. The guidelines for sending money out of the country fall under the LRS of FEMA.
Govt tightens screws on outward remittances
Under the new provisions, resident individuals, including minors, can send up to $250,000 (approximately Rs 2.06 crore) overseas per year through the LRS without requiring prior approval from the RBI. The government has imposed 20% tax on foreign remittances, except for overseas education and medical treatment.
In the FY23, there was an outflow of $27.14 billion (over Rs 2.22 lakh crore) under the LRS route. Previously, credit card transactions were excluded from the LRS. These amendments aim to promote fairness, transparency, and effective management of foreign exchange transactions while preventing misuse and ensuring compliance with disclosure requirements.
Banks are now confident that the new reporting system will help identify certain exemptions and thousands of low-value transactions that were previously overlooked. Indians who spends $10,000 (Rs 8,20,000) through credit cards abroad will end up paying $2,000 (Rs 1,64,000) in taxes. Indians have been increasingly using credit and debit cards abroad instead of travellers’ checks or forex cards. The hefty 20% tax is expected to significantly redce outward remittances, as credit cards, gifts, and support for relatives abroad are likely to decrease in the near term. Previously, the use of credit cards for payments during travel outside India was not included in the LRS limit.
At this 20% tax rate, the government is expected to collect a TCS of Rs 22,400 crore on overseas travel expenses of Rs 1.12 lakh crore ($13.66 billion). This represents a 185% increase from the $4.8 billion recorded by Indians in FY2019.
In the Budget 2023-24, the government proposed raising the TCS rate to 20% from 5% above the Rs 7 lakh threshold. The TCS for overseas tour packages was also increased to 20% from the previous 5%, effective from July 1.
Foreign remittances into India have also been affected with the country experiencing a low growth rate of 0.2% in 2023. India had received $111 billion in remittances last year at a growth rate of more than 24%, according to the latest Migration and Development Brief of the World Bank. The lower remittance inflows this year can be attributed to the slow growth in OECD and GCC economies, as well as the high base effect.
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Remittances are an important source of funds for many countries. They are extremely crucial at a time when the world is grappling with the impact of the Ukraine-Russia conflict and the aftermath of the Covid-19 pandemic. Estimating the exact size of remittance flows can be cumbersome since many transfers occur through unofficial channels. In 2011, officially recorded international migrant remittances were estimated to exceed $483 billion worldwide, with $351 billion flowing to developing countries. It is believed that unrecorded flows through informal channels are at least 50% larger than recorded flows. Remittances are especially crucial for low-income countries as they account for around 6% of these countries’ gross domestic product, compared with 2% in the case of middle-income countries.
Some countries are trying to reduce the cost of sending money abroad in line with the sustainable development goals. Unlike India, many countries have chosen to be lenient. Countries such as the UK have not imposed any limit on the amount a citizen can take out of the country.