Finance Ministry releases FAQ clarifying TCS on LRS – PART 1

The amendment of Foreign Exchange Management (Current Account Transactions) Rules, 2000 on 16th May 2023 omitting Rule 7 led to several queries. The Ministry of Finance has released the Frequently Asked Questions (FAQs) on 18th May 2023 with respect to Tax Collection at Source (TCS) on Foreign Remittance through the Liberalised Remittance Scheme (LRS).

The Central Government in consultation with the Reserve Bank of India included International Credit Card transactions into the LRS through amendment which will affect travellers planning for the trip abroad and who use credit cards for transactions. The consequence of the amendment is that 20% TCS shall be applicable to such transactions from July 1st 2023.

The ministry has released FAQs in two parts i.e. Part A and B. Part A provided the clarifications on the Tax Collection at Source and Part B clarified the Liberalised Remittance Scheme.

PART A – Clarifications on Tax Collection at Source

For the query why TCS is collected, the ministry clarified that Section 206C of the Income-Tax Act 1961 provides for TCS in the business of trading in alcohol, liquor, forest produce, scrap etc. Sub-section (IG) of the aforesaid section provides for TCS on foreign remittance through the Liberalised Remittance Scheme and on the sale of overseas tour packages.

The ministry clarified in the FAQ that only such remittances which are covered under LRS are liable to TCS. The reasons for the amendment stated are:

• The payment of TCS is not a final tax
• If the TCS payee is a taxpayer, he can claim credit for the TCS as his tax payment against regular income and adjust it against the advance tax etc., payments accordingly.
• If the TCS is of a person not being a taxpayer, then the 200 0 rate on such presumed income is not high. The tax rate slab of 2000 starts in the new regime for incomes over Rs 12 lacs and is 3000 for incomes over Rs 15 lacs.
• Instances have come to notice where the LRS payments are disproportionately high when compared to the disclosed incomes No changes in medical or Education expenses- Position stays as it was before the Finance Act 2023.
• Primary Impact only on investment in assets such as real estate, bonds, stocks outside India by HNI and tour travel packages or gifts to non-residents.
• Those individuals remitting from their own funds are normally expected to be higher-income taxpayers, and for those remitting through institutional loans for education, a concessional rate of 0.5 00 is provided.

There has been no change in the remittance for the purpose of education and medical care, according to the frequently asked questions published by the Ministry of Finance. If the remittance is not made possible by a loan from a financial institution, the TCS rate will be 5%. Furthermore, the TCS rate will be 0.5% for any amount remitted from a loan from a financial institution as described under Section 80E of the Income Tax Act.

However the percentage of the sale of overseas tour packages and any other remittance for bonds, shares, real estate gifts..etc has increased to 20%. There is no change in the threshold limit also. It will be still Rs. 7 Lakhs.

The two main areas that need explanation were education and medical care. However, the FAQ merely specified that the TCS rate would apply to remittances for medical care and education, respectively. Added that the ministry would publish a thorough explanation of the matter separately.

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