Background – credit card payments under FEMA
India has come a long way in liberalizing foreign exchange transactions for its residents. The legal framework for the administration of foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999 (FEMA). Earlier, transferring money overseas was a cumbersome procedure involving numerous approvals from the Reserve Bank of India (RBI).
However, as India solidified its position in the global markets, open cross-border capital flow became crucial for holistic economic growth. Thus, the RBI introduced LRS for individuals to remit/spend in foreign exchange easily.
LRS allows Indian residents to freely remit up to USD 250,000 per financial year for current or capital account transactions or a combination of both, as prescribed. Any remittance exceeding this limit requires prior permission from the RBI.
Erstwhile, as per Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules 2000, the use of an international credit card towards meeting expenses while on a visit outside India was not covered under the LRS limit as above.
On 16 May 2023, the Ministry of Finance, in consultation with the RBI, amended the Foreign Exchange Management (Current Account Transactions) Rules, 2000, to omit the aforementioned Rule 7. Thus, forex spending through international credit cards shall now effectively fall within the purview of LRS.
This amendment would effectively mean that individuals' LRS limits would be utilized even in cases where the credit card is used for any payments/expenses/purchases outside India. Earlier, there were cases where individuals (especially HNIs) could spend more than USD 2,50,000 in a year outside India by using credit cards.
Interplay with TCS under the Income-tax Act
Section 206C(1G) of the Income-tax Act provides for TCS to be collected by authorized dealers on any remittance under LRS, subject to certain thresholds.
The provisions of this section have been recently amended by the Finance Act 2023 to increase the TCS rate to 20% (from the erstwhile 5%) with effect from 1 July 2023 on all remittances under LRS (except for purposes of education or medical treatment), without any threshold.
In light of this amendment made to the FEMA rules as above, the credit card transactions by individuals under LRS shall also now fall within the purview of TCS.
This change led to a lot of confusion and required
clarifications on certain aspects. Accordingly, the Finance
Ministry immediately issued FAQs and also provided relaxation
wherein spending upto INR 0.7 million per financial year from
international debit and credit cards would be excluded from the LRS
limits and hence, will not attract any TCS1.
Clarifications issued - FAQs
Key aspects clarified by way of FAQs are as follows:
- The primary impact of this amendment is only on investments in assets, tour travel packages or gifts to non-residents, as the rates and threshold remain the same for educational and medical expenses.
- It has been clarified that even if the TCS is of a person who is not a taxpayer, 20% tax on such presumed income shall not be considered high.
- The need for this amendment stems from the fact that many payments were being made using credit cards which should be a part of LRS. However, these payments were not being considered for LRS limits by relying on the erstwhile Rule 7.
- TCS on travel and incidental expenses related to education and medical treatment will be covered within the rates and thresholds for education and medical treatments themselves.
- It has been clarified that LRS shall not cover business visits of employees where the employer bears the expenses. Such payments will be treated as residual current account transactions outside of LRS.
Accordingly, the revised position on TCS would be as
follows:
Nature of remittance | Upto 30 June 2023 | From 1 July 2023 | ||
Rate | Threshold (INR) | Rate | Threshold (INR) | |
Medical treatment | 5% | 700000 | 5% | 700000 |
For Education (not out of loan funds) | 5% | 700000 | 5% | 700000 |
Education related spends (out of loan funds obtained from a financial institution) | 0.50% | 700000 | 0.50% | 700000 |
International spends on credit or debit cards | 5% | 700000 | 20% | 700000 |
Gifts to non-residents, investments in bonds, stocks or real estate, etc. | 5% | 700000 | 20% | NIL |
Purchase of overseas tour travel package | 5% | NIL | 20% | NIL |
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Footnote
1. Based on press release dated 19 May 2023 and necessary changes to FEMA rules would be carried out separately.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.