On Thursday, the Finance Ministry provided a set of Frequently Asked Questions (FAQs) to address concerns regarding the Tax Collection at Source (TCS) on foreign remittances made through the Liberalised Remittance Scheme (LRS).
The Liberalised Remittance Scheme allows all resident individuals, including minors, to easily send money abroad, up to $250,000 per financial year (April to March), for various types of permissible current or capital account transactions or a combination of both.
The Finance Ministry, one day after making changes to the Foreign Exchange Management (Current Account Transaction) Rules, released a comprehensive list of FAQs explaining the rationale behind the inclusion of foreign expenditures made through credit cards.
In the Union Budget 2023-24, the Tax Collection at Source (TCS) rates for overseas tour packages and funds remitted under the LRS (excluding education and medical purposes) were raised from the current 5% to 20%. These revised TCS rates will be implemented starting from July 1, 2023.
Why is TCS required to be collected?
The reason for collecting Tax Collected at Source (TCS) is outlined in Section 206C of the Income-Tax Act 1961. This section specifies that TCS should be collected in businesses involving alcohol, liquor, forest produce, scrap, and similar activities.
Additionally, Sub-section (1G) of the same section mandates TCS on foreign remittances made through the LRS and on the sale of overseas tour packages. These provisions are in place to ensure proper tax compliance and revenue generation in the specified sectors.
Is TCS applicable to all remittances made abroad?
No, Tax Collected at Source (TCS) does not apply to all remittances made abroad. It only applies to remittances that fall under the Liberalised Remittance Scheme (LRS) purview. Remittances covered under LRS are subject to TCS, while other types of remittances may not be liable for TCS.
What is the reason behind the increase in TCS rates?
The amendment to the rates of Tax Collected at Source (TCS) was motivated by the following factors:
- TCS is not considered a final tax: The payment of TCS is not regarded as a final tax obligation. If the recipient of the TCS is a taxpayer, they can claim credit for the TCS amount as a tax payment against their regular income. This credit can be adjusted against their advance tax payments and other relevant tax liabilities.
- Tax credit for taxpayers: If the TCS payee is a taxpayer, they can utilise the TCS payment as a credit against their overall tax liability. This allows them to adjust the TCS amount against advance tax payments and other applicable taxes.
- Moderate rate for non-taxpayers: If the recipient of the TCS is not a taxpayer, the 20% rate applied to the presumed income is not excessively high. Under the new tax regime, the tax rate of 20% applies to incomes exceeding ₹12 lakhs, while the rate of 30% is applicable to incomes exceeding ₹15 lakhs. Therefore, the increased TCS rate aligns with the tax rates applicable to individuals falling within these income brackets.
It has been observed that there are cases where payments made through the LRS are significantly higher than the disclosed incomes of individuals. It’s important to note that no changes have been made to medical or education expenses, and the existing provisions remain the same as before the Finance Act of 2023.
The primary impact is mainly on investments in assets like bonds, real estate and stocks outside India by High Net Worth Individuals (HNIs) and tour travel packages or gifts to non-residents.
Individuals who are remitting funds from their own sources are typically expected to be higher-income taxpayers. For those who remit through institutional loans for educational purposes, a concessional rate of 0.5% is provided. This provision aims to offer certain benefits to individuals seeking education loans while ensuring compliance with tax regulations.
What is the impact on travel and incidental medical treatment and education expenses?
Regarding TCS on remittances for travel and incidental medical treatment and education expenses, the applicable TCS rates for education and medical treatment remittances will be implemented.
It is important to note that spending in foreign currency through international credit cards will get covered under the Reserve Bank of India’s (RBI) LRS. Under this scheme, residents are allowed to remit funds abroad, up to a maximum of $250,000 per annum, without requiring authorisation from the RBI, as stated in a notification by the Finance Ministry.
However, any remittance exceeding $250,000 or its equivalent in a foreign currency will require approval from the RBI. This ensures proper regulation and oversight for larger remittances made beyond the prescribed limit.
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