On May 16, 2023, the Ministry of Finance ("MoF") notified the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023 ("2023 Amendment") to omit Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 ("Rules"), with immediate effect, thus effectively including forex spending through international credit cards under the Liberalised Remittance Scheme ("LRS"). Rule 7 of the Rules exempted the overseas use of international credit cards from the LRS. The LRS was introduced by the Reserve Bank of India ("RBI") on February 4, 2004 as a liberalization measure to facilitate resident individuals to remit funds abroad for permitted current or capital account transactions or a combination of both. Under the LRS, remittances by resident individuals (including minors) upto USD 250,000 per financial year (April-March) are allowed for any permitted or capital account transactions or a combination of both. The LRS is not available to corporates, partnership firms, HUF, Trusts etc.
Explaining the need behind this move, the MoF said, "Data collected from top money remitters under the LRS reveals that international credit cards are being issued with limits in excess of the present LRS limit of USD 250,000. 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 expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits. The RBI had written to the government on more than one occasion, pointing to the need to remove this differential treatment."
Rule 7 of the Rules exempted the use of international credit cards from the LRS for payments made towards expenses incurred by an Indian resident individual outside India from Rule 5 of the Rules. Rule 5 of the Rules mandates prior approval of the RBI for any remittance in excess of USD 250,000 for the purposes described therein (including private visits to any country other than Nepal and Bhutan, gift or donation, maintenance of close relatives abroad etc.). Therefore, expenditures incurred outside India through credit cards were not accounted for under the LRS limit, which resulted in some individuals exceeding the LRS limits. "Under the LRS, in the financial year 2021-22, a total of USD 19.61 billion was remitted, rising from USD 12.68 billion in 2020-21. In 2022-23, it rose to more than USD 24.0 billion, of which overseas travel accounted for more than half.1"
Prior to the 2023 Amendment, all current account transactions undertaken on international credit cards in India were subject to Rule 5 of the Rules and covered under the LRS. The 2023 Amendment does not affect any changes in the use of international credit cards by residents while in India, clarified the MoF. It is to be noted that payments by debit cards have been treated as the LRS even earlier.
Further, earlier this year, the Union Budget, 2023 increased the tax collection at source ("TCS") for foreign remittances (except for education and medical purpose) under the LRS from 5% to 20%, tht is to come into effect from July 1, 2023. It was clarified that one of the reasons for the increased rate of TCS is that a number of instances have come to notice where LRS payments are disproportionately high when compared to disclosed incomes.
The 2023 Amendment and the resultant levy of 20% TCS evoked various concerns about the applicability of TCS to small transactions under the LRS from July 1, 2023. In order to avoid any procedural ambiguity, the MoF released a clarification on May 19, 2023 and decided that any payments by an individual using their international debit or credit cards upto Rs. 7,00,000/- per financial year will be excluded from the LRS limits and hence, will not attract any TCS. The clarification also stated that existential beneficial TCS treatment for education and medical purpose will continue to apply.
The 2023 Amendment is a step towards eliminating the different treatment accorded to transactions made on debit cards and credit cards, in the interest of consistency and justness in the treatment of modes of drawal of foreign exchange and for capturing total expenditure under the LRS. The 2023 Amendment will also encourage and require persons undertaking transactions through international credit cards to be cognizant of the restrictions on transactions provided under the Rules.
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