Credit Card Transactions Abroad Under Scanner Again

Sub: Economy

Sec: External Sector

Key Points:

Government Focus: With the increase in remittances under the Liberalised Remittance Scheme (LRS), international credit card spending is now a significant area of government scrutiny.
Current Status: Although on the government’s radar, a decision regarding the implementation date for bringing international credit card transactions under LRS has yet to be finalized.

Background:

LRS Coverage: Debit cards are already included under LRS, while international credit card transactions were temporarily excluded from being counted as LRS and subject to Tax Collected at Source (TCS).
Previous Notification: In May, the Finance Ministry issued a notification to include credit cards under LRS with a 20% TCS. However, implementation was postponed to allow banks and card networks to develop the necessary IT solutions.

LRS Limits and Provisions:

Remittance Limit: Under LRS, all residents, including minors, can remit up to $250,000 per financial year for permissible current or capital account transactions.
Potential Inclusion: Reports indicate that the Reserve Bank of India (RBI) has instructed banks to prepare for the inclusion of international credit card spending in LRS.

Significance:

Monitoring and Regulation: As international travel and spending increase, the government aims to better monitor and regulate the outflow of funds through credit card transactions abroad.
Tax Implications: Bringing international credit card transactions under LRS will subject them to TCS, ensuring better tax compliance and monitoring.

Conclusion:

The inclusion of international credit card transactions under LRS reflects the government’s efforts to tighten control over outbound remittances and ensure comprehensive financial oversight.

Liberalised Remittance Scheme (LRS)

About:

Introduction: This scheme was introduced by the Reserve Bank of India in 2004.
Eligibility: All resident individuals, including minors, are allowed to remit up to USD 250,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both.

Not Eligible:

The scheme is not available to corporations, partnership firms, Hindu Undivided Families (HUF), Trusts, etc.
Frequency of Remittances: No restrictions on frequency, but once the limit of USD 250,000 is reached in a financial year, no further remittances can be made under LRS.

Uses of Remitted Money:

Expenses: Can be used for private or business travel, medical treatment, study, gifts and donations, and maintenance of close relatives.
Investments: Investment in shares, debt instruments, and immovable properties overseas.
Foreign Currency Accounts: Individuals can open, maintain, and hold foreign currency accounts with banks outside India for transactions permitted under the scheme.

Prohibited Transactions:

Specific Prohibitions: Any purpose prohibited under Schedule-I (like purchasing lottery tickets, proscribed magazines, etc.) or restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
Foreign Exchange Trading: Trading in foreign exchange abroad.
High-Risk Countries: Capital account remittances to countries identified by FATF as “non-cooperative countries and territories”.
Terrorism Risk: Remittances to individuals and entities posing significant terrorism risks as advised by the Reserve Bank.

Requirements:

PAN Requirement: It is mandatory for the resident individual to provide their Permanent Account Number (PAN) for all LRS transactions made through Authorized Persons.

Tax Collected at Source (TCS)

Definition:

Seller’s Tax: TCS is the tax payable by a seller, collected from the buyer at the time of sale of specified goods or services.

Governance:

Section 206C: Governed by Section 206C of the Income-tax Act, specifying applicable goods/services and TCS rates.
Goods/Services: Applicable to goods/services like liquor, timber, tendu leaves, scrap, minerals, motor vehicles, parking lots, toll plazas, mining, quarrying, and foreign remittance under LRS.

Requirements:

TAN: The seller must have a Tax Collection Account Number (TAN) to collect and deposit TCS with tax authorities.
TCS Certificate: The seller must issue a TCS certificate to the buyer within a specified time, showing the amount of tax collected and deposited.
Credit Claim: The buyer can claim credit for the TCS amount when filing their income tax return.

Foreign Exchange Management Act (FEMA), 1999

Overview:

Legal Framework: Provides the legal framework for the administration of foreign exchange transactions in India.
Enforcement: Came into force on 1st June 2000.

Transaction Classification:

Current Account Transactions:
- Definition: Transactions by a resident that do not alter their assets or liabilities outside India.
- Examples: Payments related to foreign trade, travel, education, etc.
Capital Account Transactions:
- Definition: Transactions that alter a resident’s assets or liabilities outside India.
- Examples: Investment in foreign securities, acquisition of immovable property abroad, etc.