The Ministry of Finance on Thursday said that 20% TCS (tax collection at source) applicable on remittances covered under the Liberalised Remittance Scheme (LRS) is not high.
"If the TCS is of a person who is not a taxpayer, then the 20% rate on such presumed income is not high," the ministry says in a tweet, adding that the tax rate slab of 20% starts in the new regime for income over ₹12 lakh.
This comes after the government amended the Foreign Exchange Management (Current Account Transactions) Rules, 2000 by omitting Rule 7, which exempted international credit cards from LRS for payments made towards meeting expenses on a foreign trip.
Following the amendment, credit card transactions on overseas tours will attract 20% TCS from July 1.
Instances have come to notice where the LRS payments are disproportionately high when compared to the disclosed incomes, the ministry says.
The primary impact of this move will only be on investments made in assets such as real estate, bonds, and stocks outside India by high net-worth individuals (HNI) and tour packages or gifts to non-residents, it says in its clarification.
Credit cards on par with debit cards
The finance ministry points out that payments via debit cards used to fall under the LRS even earlier. "Due to the exemption under Rule 7, expenditures through credit cards were not accounted for under the specified LRS limit, which has led to some individuals exceeding the LRS limit," it says.
"The differential treatment between debit cards and credit cards needed to be removed in the interest of uniformity and equity in the treatment of modes of drawal of foreign exchange and for capturing total expenditure under LRS for prudent forex management and to prevent by-passing of LRS limit," it explains.
Data collected from top money remitters under the LRS reveals that international credit cards are being issued with limits in excess of the current LRS limit of $2,50,000, the ministry claims.
Indian residents are allowed to remit up to $250,000 (around ₹2.06 crore) per year without any prior approval from the Reserve Bank of India (RBI). This does not include remittances for Nepal and Bhutan.
In her Budget speech, Finance Minister Nirmala Sitharaman also said that payments for foreign tours through credit cards are not being captured under the LRS and they escape tax collection at source.
The RBI had written to the government on more than one occasion, pointing to the need to remove this differential treatment, the ministry says, adding that the LRS does not cover business visits of employees.
Russell Gaitonde, partner, Deloitte India, says the Indian government has made unequivocally clear that the LRS will also extend to forex transactions undertaken by an individual when he or she uses his international credit card for making forex payments.
"These forex payments will cover credit card transactions undertaken by the individual not only while travelling abroad, but also while being physically present in India and making forex purchases, such as online purchases," Gaitonde adds.