APPLICABILITY OF COLLECTION OF TAX AT SOURCE (“TCS”) FOR REMITTANCES UNDER LIBERALISED REMITTANCE SCHEME (“LRS”).
The Income Tax Act, 1961 under section 206C, provides for the collection of tax at source on foreign remittances through the Liberalised Remittance Scheme and also on the sale of overseas tour packages.
From 1st July 2023 a Collection of Tax at Source which will be at 20% changed from the earlier 5% will apply on overseas tour packages and remittances under the Liberalised Remittance Scheme, barring educational and medical treatment purposes. If an education loan is taken from a specified financial institution, then the Collection of Tax at Source would be collected at the rate of 0.5%.
From 16th May 2023 vide a notification in the official gazette, the Indian government omitted Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000. Rule 7 of the FRM Rules, 2000 exempted the use of credit cards from Liberalised Remittance Scheme for payments made by a person who at the point of time of making the payment was outside India. The said omission of Rule 7 led to several queries which have been answered by the Central Government by releasing a list of frequently asked questions on 18th May 2023 which clarified the following:
Remittances for medical treatment exceeding Rs. 7,00,000/- (Rupees Seven Lakh Only) and education loans (other than loans taken from a specified financial institution) will attract a rate of 5% for Collection of Tax at Source. Remittances that are related to foreign tours, real estate investment and travel shall attract a rate of 20% for Collection of Tax at Source.
Persons who avail loans from specified financial institutions for education above the threshold of Rs. 7,00,000/- (Rupees Seven Lakh Only) will attract the rate of 0.5% for collection of tax at source.
Only the forms of remittances mentioned in the Liberalised Remittance Scheme are liable for collection of tax at source.
The Liberalised Remittance Scheme does not recognise business visits of an employee, such expenses of the employee will be treated as residual current account transactions which may be permitted by the specified authorised banker without any limit. Such a transaction will be subject to verifying the bona fide nature of the transaction.
Further, concerns were raised on the applicability of TCS on small transactions, to which the Indian Government issued a press release on 19th May 2023 that all transactions of a person using their international debit or credit card amounting to less than Rs. 7,00,000/- (Rupees Seven Lakh Only) per financial year will not be covered under the Liberalised Remittance Scheme and thus will not attract collection of tax at source.