Context: Recently, the Central Government has amended rules under the Foreign Exchange Management Act (FEMA) to bring international credit card spending outside India under the Liberalised Remittance Scheme (LRS).

Liberalised Remittance Scheme (LRS)

• Liberalised Remittance Scheme (LRS) 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

• 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.

What is the change brought by the government related to the usage of credit cards?

• Credit card spending outside India has been brought under the ambit of the Liberalised Remittance Scheme (LRS).

• Under the LRS, Indian residents are allowed to remit up to $250,000 per year without any prior approval from the RBI.

• This means any remittance beyond USD 2.5 lakh or its equivalent in foreign currency would require approval from the RBI.

• Moreover, bringing credit card transactions under LRS enables the levy of a tax collection at source(TCS).

• Note: The Union Budget 2023-24 hiked TCS rates to 20% from 5% currently, on overseas tour packages and funds remitted under LRS (other than for education and medical purposes).  The new tax rates will come into effect from July 1, 2023.

What has been the response of experts to these changes in the usage of credit cards abroad?

• Firstly, the changes in credit card spending will likely add to the compliance burden of banks and financial institutions. If the aim was to track overseas transactions, the TCS rate of 20% is probably too high and could have been instead at 1-2%.

• Secondly, TCS being a direct tax levy collected by the seller of specified goods from the buyer and deposited to the government could add to the burden of a traveller at the time of purchase of a tour package. 

• While taxpayers can claim refunds on the TCS levy at the time of filing their returns, this could result in their funds being locked until the refund is initiated by the tax department.

• Thirdly, this move will impact hundreds of thousands of private and business travellers who will have to set aside an additional 20 per cent that will eat into cash flows, bloat budgets, and could end up militating against the seamless movement of people in a globalized world.