FEMA Tax Modification Excludes Corporates: Find insights on remittances

Recent modifications to the Foreign Exchange Management Act (FEMA) rules have impacted remittance affairs for every Indian.

However, it is essential to note that these new tax modifications do not apply to corporate cards.

To ensure parity in the tax treatment of debit and credit card remittances under the Reserve Bank of India (RBI) Liberalized Remittance Scheme (LRS). As a result, overseas international credit card spending will now fall under the purview of the LRS. These changes aim to promote fair taxation and regulate the excessive use of credit cards for foreign expenditures.

This article delves into the details of the recent amendments and their implications.

The finance ministry has stated the modifications to the FEMA regulations. The modifications include foreign credit card expenditures outside the country under the RBI’s Liberalized Remittance System (LRS), which provides equity in the tax treatment of debit and credit card remittances.

The ministry stated that using credit cards while traveling has been included in LRS. Such remittances are subject to tax collected at source (TCS) at the appropriate rates. If the recipient of the TCS is a taxpayer, they may claim credit and apply it to their I-T or advance tax liability.

TCS rates on international travel packages and money sent under LRS (aside from for medical and educational expenses) were increased in the Union Budget 2023–24 from 5 percent to 20%.

The new TCS rates will be in force at the beginning of July 1, 2023.

The ministry released a list of frequently asked questions (FAQs) describing the justifications for including foreign credit card spending the day after amending the Foreign Exchange Management (Current Account Transaction) Rules.

According to the statement, there have been instances where the tax authorities have noticed that some people’s LRS remittances are “disproportionately high” compared to their disclosed sources of income.

International debit cards, international credit cards, or other methods can be used by someone visiting abroad to conduct current account transactions.

Although the LRS covered debit card payments, the ministry stated that credit card purchases were not included in the LRS calculation, which led to some people exceeding the LRS limitations. International credit cards were being issued with limits beyond the current LRS restriction of USD 2.50 lakh, according to data gathered from top money remitters under LRS.

The ministry further added that the Reserve Bank of India had repeatedly written to the government urging it to eliminate the special status given to debit and credit card purchases.

“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 withdrawal of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent bypassing of LRS limits,” the ministry said.

A single individual may send up to USD 2.5 lakh abroad annually under the RBI’s LRS plan without the RBI’s consent. Remittances above USD 2.5 lakh or equivalent in another currency require RBI permission.

USD 19.61 billion was transferred under LRS in 2021–2022, up from USD 12.68 billion in 2020–2021. Overseas travel accounted for more than half of the total in 2022–2023, when it increased to more than USD 24 billion.

The FAQ clarified that a TCS of 5% would be applied to medical and educational costs above Rs 7 lakh, while a TCS of 20% would apply to all other charges. These other charges include real estate purchases, international travel, and vacations.

A reduced TCS rate of 0.5 percent would be applied to borrowers taking out loans for schooling abroad after their borrowing exceeds Rs 7 lakh.

The government said that only HNI who invest in assets like real estate, bonds, and stocks outside of India and provide gifts or vacation packages to non-residents would see the immediate consequences of a higher TCS rate.

“If the TCS is of a person not being a taxpayer, then the 20 percent rate on such presumed income is not high. The tax rate slab of 20 percent starts in the new regime for incomes over Rs 12 lacs and is 30 percent for incomes over Rs 15 lacs,” the ministry said.

The government further emphasized that LRS does not cover an employee’s work trips. Such costs will be considered residual current account transactions outside LRS when an organization deputes an employee, and the AD may approve them without restriction, provided that the transaction’s legitimacy can be confirmed.

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