By - King Stubb & Kasiva on June 9, 2023
Synopses: The Ministry of Finance (MoF) issued a document, known as Part B of Frequently Asked Questions (FAQs), on May 18, 2023 which provided comprehensive information regarding foreign remittance through the Liberalised Remittance Scheme (LRS). This release followed the recent amendment made by the finance ministry to the rules outlined in the Foreign Exchange Management (Current Account Transactions) Rules, 2000.[1] The amendment specifically aimed to bring international credit card expenditure outside India within the purview of the LRS.
The Ministry of Finance, through a notification on May 16, 2023, announced the immediate omission of rule 7 from the Foreign Exchange Management (Current Account Transactions) Rules, 2000.[2] The rationale behind this decision was substantiated by the ministry's analysis of data provided by major money remitters operating under the Liberalised Remittance Scheme (LRS), which highlighted a prevalent practice of issuing international credit cards with credit limits that exceeded the current LRS threshold of USD 250,000.
The ministry emphasized the necessity of ensuring uniformity, fairness, and equitable treatment in the utilization of foreign exchange, as well as the imperative of effectively monitoring overall expenditures under the LRS. By removing the differentiation between debit and credit cards, the aim was to foster prudent foreign exchange management and curtail the potential circumvention of LRS limits.
This amendment effectively brought foreign exchange spending through international credit cards under the purview of the Liberalised Remittance Scheme (LRS). Previously, Rule 7 exempted the use of international credit cards abroad from the LRS.
The LRS was introduced by the RBI in 2004 to facilitate resident individuals in remitting funds abroad for permitted current or capital account transactions. Under the LRS, individuals (including minors) were allowed to remit up to USD 250,000 per financial year for any permitted or capital account transactions, or a combination of both. However, the LRS was not accessible to corporates, partnership firms, HUFs, Trusts, etc.[3]
The MoF justified this move by citing data collected from major remitters under the LRS, which revealed that international credit cards were being issued with limits exceeding the current LRS limit of USD 250,000.
Prior to the 2023 Amendment, Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 exempted the use of international credit cards from the LRS. This differential treatment resulted in inconsistencies, as expenditures made through credit cards abroad were not accounted for under the LRS limit.
To ensure uniformity and fairness in the treatment of foreign exchange drawls and to capture total expenditures under the LRS, the differential treatment between debit cards and credit cards needed to be eliminated. The RBI also recommended the removal of this differentiation in its communications with the government.
Previously, Rule 7 exempted the use of international credit cards from the LRS for expenses incurred by Indian residents outside India, thus bypassing the requirements of Rule 5.[4] Rule 5 mandates prior approval from the RBI for any remittance exceeding USD 250,000 for specific purposes, such as private visits to countries other than Nepal and Bhutan, gifts or donations, and maintenance of close relatives abroad.[5] Consequently, expenditures made outside India through credit cards were not accounted for under the LRS limit, resulting in individuals exceeding their prescribed limits.
In the financial year 2021-22, a total of USD 19.61 billion was remitted under the LRS, compared to USD 12.68 billion in 2020-21. By 2022-23, this figure surpassed USD 27.0 billion, with more than half attributable to overseas travel.[6]
Expenditures incurred by Indian residents outside India through international credit cards were exempted from the LRS's purview. Such transactions bypassed the requirement of obtaining prior approval from the RBI for remittances exceeding USD 250,000, as mandated by Rule 5 of the Rules.
Before the 2023 Amendment, all current account transactions conducted using international credit cards in India were subject to Rule 5 and fell under the purview of the LRS.[7] However, the MoF clarified that the 2023 Amendment does not impact the use of international credit cards by residents within India.
The Ministry of Finance's decision to include international credit card transactions under the Liberalised Remittance Scheme (LRS) was primarily motivated by carefully analyzing data collected from prominent money remitters. This data analysis unveiled a significant trend: international credit cards were issued with credit limits exceeding the prevailing LRS limit of USD 250,000. This disparity in treatment between debit and credit cards necessitated intervention to ensure consistency, fairness, and efficient monitoring of foreign exchange expenditure.
The Ministry recognized the importance of addressing this differential treatment and its implications for foreign exchange management. The Reserve Bank of India (RBI) also emphasized the necessity of eliminating this disparity, further reinforcing the need for action. By bringing international credit card transactions within the purview of the LRS, the Ministry aimed to establish a level playing field and promote equitable treatment of different modes of foreign exchange withdrawal.
The inclusion of international credit cards under the LRS aligns with the objective of prudent foreign exchange management. It allows for comprehensive tracking of all expenditures made through such cards and prevents the circumvention of LRS limits. By acting upon the insights gained from data analysis and considering the RBI guidelines for international credit cards, the Ministry of Finance took a proactive step towards achieving uniformity, fairness, and effective oversight in the realm of foreign exchange transactions.
The Union Budget of 2023 introduced a significant change by increasing the tax collection at source (TCS) rate for foreign remittances under the LRS. The TCS rate was raised from 5% to 20% for foreign remittances, excluding education and medical purposes.[8]This will be effective from July 1, 2023.[9]
The purpose of this increase was to tackle instances where LRS payments were disproportionately high compared to disclosed incomes. This move aimed to enhance tax compliance and prevent tax evasion in foreign remittances.
The introduction of the 2023 Amendment and the subsequent levy of 20% TCS raised concerns and uncertainties regarding the applicability of TCS to small transactions under the LRS from July 1, 2023. To address these concerns and provide clarity, the MoF released a clarification on May 19, 2023. The clarification stated that individual payments made using international debit or credit cards up to Rs. 7,00,000 per financial year would be excluded from the LRS limits and would not attract TCS. It further emphasized that the existing beneficial TCS treatment for education and medical purposes would continue to apply.[10]
The 2023 Amendment marks a significant step towards eliminating the differential treatment between debit and credit card transactions. By including international credit card transactions under the LRS, the amendment promotes consistency, fairness, and effective monitoring of foreign exchange expenditure. The amendment is expected to enhance compliance and raise awareness among individuals regarding the prescribed limits and regulations governing international credit card transactions. Furthermore, it underscores the government's commitment to prudent foreign exchange management.
The Ministry of Finance's decision to include international credit card transactions under the Liberalised Remittance Scheme reflects a progressive approach toward streamlining foreign exchange transactions. By eliminating the differential treatment between debit and credit card transactions, the 2023 Amendment strengthens the framework of the LRS and ensures uniformity and fairness in the treatment of foreign exchange transactions. The amendment is anticipated to enhance compliance, promote awareness, and facilitate effective monitoring of foreign exchange expenditure. Overall, it represents a significant step towards prudent foreign exchange management and aligns with the RBI's guidelines for international credit cards to the government.
The 2023 amendment eliminates the exemption for international credit card transactions from the LRS. It aims to ensure fairness, uniformity, and effective monitoring of foreign exchange expenditure by bringing credit card spending under the purview of the LRS.
The amendment includes international credit card transactions under the LRS, meaning that expenditures made through credit cards abroad will now be accounted for under the prescribed LRS limits. This ensures consistency and prevents individuals from exceeding their permitted limits.
The amendment, effective from July 1, 2023, increases the TCS rate for foreign remittances (excluding education and medical purposes) from 5% to 20%. This change aims to enhance tax compliance, prevent tax evasion, and bring balance to instances where LRS payments exceed disclosed incomes.
[1]Notification no. G.S.R. 369(E), Dated May 16, 2023
[2]Notification No. G.S.R.381(E), dated May 3, 2000
[3]https://m.rbi.org.in/scripts/FAQView.aspx?Id=115#Q1, Q1
[4]Foreign Exchange Management (Current Account Transactions) Rules, 2000, Rule 7
[5]Foreign Exchange Management (Current Account Transactions) Rules, 2000, 2000, Schedule III(See rule 5)
[6]https://www.ibef.org/news/indians-sent-us-27-14-billion-abroad-under-lrs-in-fy23-up-nearly-40-yoy
[7]Foreign Exchange Management (Current Account Transactions) Rules, 2000, Rule 5
[8]https://www.indiabudget.gov.in/doc/budget_speech.pdf, D.7
[9]https://www.indiabudget.gov.in/doc/memo.pdf
[10]https://pib.gov.in/PressReleasePage.aspx?PRID=1925592
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