Why in news?

• Starting from July 1, the Reserve Bank of India plans to implement a 20% tax on the Liberalised Remittances Scheme (LRS).
• As a result, banks are preparing their systems to monitor expenses made with international cards and collect the applicable tax on outward remittances.

What’s in today’s article?

• Liberalised Remittances Scheme (LRS)
• News Summary

What is Liberalised Remittance Scheme (LRS)?

• It was brought out by the RBI in 2004.
• It allows resident individuals to remit a certain amount of money during a financial year to another country for investment and expenditure.
• According to the prevailing regulations, resident individuals may remit up to $250,000 per financial year.

Background of LRS:

• Resident Indians or people resident in India are allowed to transfer foreign currency under the foreign exchange regulations.
  • The transfer of foreign currency outside India is governed by the Foreign Exchange Management Act, 1999 (FEMA).
• Hence, to regulate transferring of funds within a specified limit, RBI brought the LRS.

Which transactions are allowed under the LRS?

• 
• Apart from the areas highlighted in the above diagram, the remitted amount can also be invested in shares, debt instruments, and be used to buy immovable properties in overseas market.
• Individuals can also open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the scheme.

What are the Restrictions under LRS?

• LRS restricts
  • buying and selling of foreign exchange abroad, or purchase of lottery tickets or sweep stakes, proscribed magazines and so on,
  • or any items that are restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
• Also, one cannot make remittances directly or indirectly to countries identified by the Financial Action Task Force as non-co-operative countries and territories.

Recent Changes in LRS

• Announcement in Budget 2023-24
  • Budget had proposed hiking the TCS rate to 20 per cent from 5 per cent above Rs 7 lakh threshold for all purposes other than education and medical treatment.
  • Also, for overseas tour packages, the government had proposed hiking the TCS rate to 20 per cent from 5 per cent, without any threshold.
• Changes made
  • May 2023, the Government amended rules under the FEMA to bring in international credit card spends outside India under the LRS.
  • As a consequence, spending on international credit cards would have then attracted a higher rate of TCS (tax collected at source) at 20% from July 1.
  • However, later, the government clarified that any payments by an individual using their international debit or credit cards up to Rs 7 lakh per financial year will be excluded from the LRS limits and hence, will not attract any TCS.
    • TCS is a direct tax levy, which is collected by the seller of specified goods from the buyer and deposited to the government.
  • TCS can be adjusted against the overall tax liability. It can be claimed as an income tax refund or a person can avail of credit while filing the ITR or calculating the advance taxes.
  • It will not apply on the payments for purchase of foreign goods and services from India.
• 
• Rationale behind new system
  • Indians are now increasingly using credit and debit cards abroad instead of taking travellers cheques or forex cards.
  • Until now, there is no estimate of money spent through cards abroad.
  • The new system will enable the government to track high-value overseas transactions.

News Summary: Banks readying systems to track spends on outward remittances

Challenges faced by Banks in new regime

• Banks are facing difficulties in evaluating and collecting TCS exemptions for credit and debit card transactions conducted outside India.
  • RBI has decided to leave it up to the banks to handle the collection of the tax imposed by the government in the FY23-24 budget.
• Deducting TCS is not a hassle. The hassle is to take into account certain exemptions into the system.
  • The exemption of up to Rs 7 lakh created some confusion.

Outward remittances under LRS

• 
• There was an outflow of $ 27.14 billion (over Rs 2.22 lakh crore) under the LRS route in FY23.