To address ongoing concerns regarding the newly introduced 20% Tax Collected at Source (TCS) as a monitoring measure for foreign remittances in the FY24 budget, the Finance Ministry is considering further relaxing the terms associated with this tax. The aim is to alleviate apprehensions and ensure a smoother tax implementation.
A senior official has announced that a new set of Frequently Asked Questions (FAQs) will be released soon, addressing various concerns related to the newly introduced tax, scheduled to come into effect on July 1. The FAQs will also cover the Liberalised Remittance Scheme (LRS). The issuance of these FAQs raises hopes that several issues, such as the distinction between personal and official foreign exchange payments for business travellers, will be clarified.
During a CII event in Lucknow, Raman Chopra, a joint secretary with the revenue department, confirmed that clarifications and FAQs regarding the TCS would be issued. These clarifications aim to provide comprehensive information on the collection process and address any doubts or uncertainties. Additionally, the FAQs will shed more light on the threshold for forex payments subject to the tax. Chopra assured that these clarifications and FAQs are currently under discussion within the Finance Ministry and will be released soon to provide further clarity on the matter.
Stakeholders seek clarification on the distinction between personal and business expenditures during official trips, as international credit card transactions for business purposes will not be subject to the TCS. The issue revolves around determining which expenses fall under personal expenditure and which qualify as business expenditure. Clarity on this matter is being sought to ensure a clear understanding of the tax implications for different transactions made during official trips.
In response to the backlash received, the Finance Ministry announced on May 19 that forex payments made by individuals using international debit or credit cards, up to an amount of Rs 7 lakh ($844 at the current exchange rate) per financial year, will be exempt from the LRS limit. As a result, these transactions will not be subject to TCS. This move aims to address concerns and provide relief to individuals engaging in such transactions within the specified threshold.
Under the Finance Act 2023, the TCS on remittances made under the LRS was increased from 5% to 20%, effective from July. Previously, forex transactions made through debit cards were already covered under the LRS. However, starting from July 1, credit card transactions will also fall under the purview of the LRS, meaning they will be subject to the newly increased TCS rate of 20%. This change expands the scope of the LRS to include credit card transactions for forex remittances.
A notification issued on May 16 amended the relevant FEMA rules, bringing credit card transactions by individuals under the annual LRS limit of $250,000. Any expenditure exceeding this limit will require prior approval from the Reserve Bank of India (RBI).
During the TCS reconfiguration for the LRS, no adjustments were made to the existing TCS treatment for education and health payments. Presently, remittances for education made through a loan from a financial institution are subject to a TCS of 0.5% beyond the threshold of Rs 7 lakh. Likewise, remittances for medical treatment incur a TCS of 5% beyond the threshold of Rs 7 lakh. These TCS rates and thresholds remain unchanged under the current revisions to the LRS.
According to the ministry, the increased TCS would primarily affect investments in assets like real estate, bonds, and stocks outside of India by High-Net-Worth Individuals (HNIs), tour travel packages and gifts to non-residents. The 20% TCS rate raised concerns due to potential fund blocking. The ministry clarified that individuals could claim the TCS amount back when filing income tax refunds or as a credit, adjusting it against advance tax. However, experts noted that interest would be accrued from the next fiscal year’s April 1 until the date of payment rather than from the TCS date. Travel companies voiced opposition, and banks are expected to face increased compliance burdens.
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