On May 16, 2023, in consultation with the Reserve Bank of India (RBI), the Ministry of Finance, Government of India (GoI) omitted Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 under Foreign Exchange Management Act (FEMA) and included the international credit cards (ICCs) spendings outside India under the RBI’s Liberalised Remittance Scheme (LRS) and also be subjected it to a higher rate of 20% Tax Collected at Source (TCS) effective after July 1, 2023.
- Note: Rule 7 exempts overseas use of ICCs from ‘Rule 5’, which mandates prior approval from the RBI.
Key Points:
i.Prevailing Rules: Only debit cards, forex (Foreign exchange) cards, and bank transfers were included in the LRS limit and the usage of ICCs for making payments for fulfilling expenses during travel outside India was not included in the LRS limit.
ii.Now due to the amendment the privilege provided for ICCs will no longer be available and now the spending by ICCs will also be treated at par with other money transfer instruments.
Applicability of TCS:
i.TCS is the tax the seller collects from the buyer at the point of sale so that it can be deposited with the tax authorities. Banks deduct TCS on foreign remittances.
ii.The amendment of FEMA was made in accordance with the announcement made in budget 2023-23 and the TCS for foreign remittances under LRS was raised from 5% to 20% on overseas tour packages and funds remitted under LRS (other than for education and medical purposes).
- Till July 1, 2023, a 5% TCS would be levied on ICCs transactions.
- To eliminate procedural ambiguity, it was decided that individual payments up to Rs 7 lakh per financial year made using international debit or credit cards would be excluded from the LRS limits and therefore not subject to TCS.
iii.Medicine and Education: TCS of 5% will be levied towards medical treatment expenses exceeding Rs 7 lakh. A lower TCS rate of 0.5% would be levied above the Rs 7 lakh threshold for those availing loans for overseas education.
What is LRS scheme?
i.LRS is a scheme which allows Indian Resident Individuals (including minors) to remit funds outside India up to USD 250,000 or its equivalent in any freely convertible foreign currency per financial year (April-March) for any permissible capital or current account transaction or a combination of both without any prior approval from the RBI.
Exception: The amended LRS rule will not be applicable for payments made through money held in Resident Foreign Currency (RFC) Account in a bank in India.
Note – The inclusion of ICCs transactions under LRS will support tracking high-value overseas transactions and it will not apply to the payments for the purchase of foreign goods/services from India.
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About Reserve Bank of India (RBI):
Governor– Shaktikanta Das
Deputy Governors – Mahesh Kumar Jain, Michael Debabrata Patra, M. Rajeshwar Rao, T. Rabi Sankar
Headquarters – Mumbai, Maharashtra
Establishment – 1st April 1935
