Liberalised Remittance Scheme (LRS)

Context:

Twenty per cent tax on Liberalised Remittances Scheme (LRS) of the Reserve Bank of India is set to kick off soon.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

1. Key Highlights
2. Liberalised Remittance Scheme (LRS)
3. Possible Impacts

Key Highlights:

Existing Mechanism:

• Payments made using international credit cards for expenses during trips abroad were not covered under the Liberalised Remittance Scheme (LRS).
• These expenses were excluded under Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000.

Changes Made:

• Rule 7 has been omitted, allowing such expenses to be included under the LRS.
• The 20% Tax Collected at Source (TCS) rule now applies to credit card transactions on international purchases, including direct bookings.
• However, the TCS does not apply to payments for the purchase of foreign goods/services from India.

Budget 2023-24 and TCS Provisions:

• In the Budget for 2023-24, the government made changes to the TCS limits for foreign remittances.
• Tax Collected at Source (TCS) is a direct tax levy collected by the seller from the buyer and deposited to the government.
• For foreign outward remittances under LRS (excluding education and medical purposes), a 20% TCS will be applicable from July 1, 2023.
• Previously, a 5% TCS was applicable for foreign outward remittances above Rs 7 lakh, and a 5% TCS without any threshold applied to overseas tour packages.

Liberalised Remittance Scheme (LRS):

Introduction and Eligibility:

• The Reserve Bank of India introduced the Liberalised Remittance Scheme in 2004.
• The scheme allows resident individuals, including minors, to freely remit up to USD 2,50,000 per financial year for permissible current or capital account transactions.
• Corporations, partnership firms, Hindu Undivided Family (HUF), trusts, etc., are not eligible for the scheme.

Remittance Limit and Frequency:

• There are no restrictions on the frequency of remittances under LRS.
• Once an individual has remitted up to USD 2,50,000 during the financial year, they cannot make any further remittances under the scheme.

Permissible Usage of Remitted Money:

• Remittances can be used for various purposes, including travel expenses (personal or business), medical treatment, education, gifts and donations, maintenance of close relatives, etc.
• Funds can be invested in shares, debt instruments, and immovable properties in overseas markets.
• Individuals can open and maintain foreign currency accounts with banks outside India for transactions allowed under the scheme.

Prohibited Transactions:

• Transactions specifically prohibited under Schedule-I or restricted under Schedule-II of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 are not allowed.
• Trading in foreign exchange abroad is prohibited.
• Capital account remittances to countries identified as “non-cooperative countries and territories” by the Financial Action Task Force (FATF) are not permitted.
• Remittances to individuals and entities identified as posing a significant risk of terrorism, as advised by the Reserve Bank, are also prohibited.

Requirements:

• Resident individuals must provide their Permanent Account Number (PAN) for all transactions under LRS conducted through Authorized Persons.

Possible Impacts:

Tedious Task for Banks:

• Banks will face a challenging task of monitoring and keeping track of each transaction to ensure compliance with the 20% Tax Collected at Source (TCS) rule.

Transactions Outside TCS Purview:

• Transactions for education and medical expenses, among others, remain exempt from the higher 20% TCS, creating complexity in tracking and applying the tax.

Increased Cost of Foreign Travel:

• Foreign travel expenses will become 20% more expensive due to the blocked amount that will be refunded through the income tax process.

Refunds and Income Tax Filing:

• Taxpayers will have the option to claim the 20% TCS back while filing their Income Tax Returns (ITR). However, this process adds an additional step and time before the amount is refunded.

Widening Pricing Gap:

• The introduction of a 5% TCS on LRS remittances in 2020 already caused a significant loss of business for domestic travel and tour agents.
• Global Travel Agents (GTAs) that evade TCS compliance can offer better pricing on their platforms, creating a pricing gap.
• The four-fold increase in the tax rate further widens the pricing gap, making upfront costs for travelers even higher when booking with domestic travel agents.

-Source: Indian Express