Stay updated with the latest tax update: FEMA amendment includes forex credit card payments within the LRS scheme. Manage international transactions seamlessly.

Introduction

1. In May 2023, the Ministry of Finance made a significant change to the Foreign Exchange Management Act (FEMA) rules in India. The change involved bringing international credit card spending under the purview of the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI). This change aims to achieve tax parity between different payment methods and curb the increasing trend of global spending by Indian overseas visitors.
2. Previously, international credit card holders enjoyed certain exemptions from tax regulations under Rule 7 of the FEM (CAT) Rules 2000. However, the Ministry of Finance, in consultation with the RBI, decided to remove this relaxation and subject overseas credit card spending to the LRS. The LRS allows Indian residents to spend up to 2.50 lakh per financial year outside India without prior approval from the RBI.
3. The government’s decision to include international credit card spending under the LRS also entails the implementation of a higher tax collected at source (TCS) rate. Initially, a TCS rate of 20% will be levied on international credit card transactions from July 1, 2023, with the exception of transactions related to medical and educational purposes. This change has generated significant discussions and debates among the public, leading to the government addressing concerns through a list of frequently asked questions (FAQs).
4. The aim of this blog is to provide a comprehensive understanding of the recent changes in FEMA rules and their implications for the general public. We will explore the rationale behind the inclusion of international credit card spending under the LRS, the impact on credit card users, and the challenges faced by financial institutions in implementing these changes. By the end of this blog, readers will have a clearer grasp of the new regulations and how they may affect their financial planning and transactions during overseas visits.

Background of the Change

1. The inclusion of international credit card spending under the Liberalised Remittance Scheme (LRS) marks a significant change in the Foreign Exchange Management Act (FEMA) rules in India. To understand the background of this change, it is important to consider the rise in global spending by Indian overseas visitors and the previous relaxation provided to international credit card users.
2. In recent years, there has been a notable increase in the amount spent by Indian individuals during their visits abroad. According to ABP Live, global spending by Indian overseas visitors rose from 12.68 billion in 2020-21 to 19.61 billion in 2021-22. Furthermore, it surged to 24 billion in 2022-23. This upward trend in global spending has raised concerns among regulatory authorities and prompted the need for regulatory measures.
3. Under the previous FEMA rules, international credit card holders enjoyed exemptions under Rule 7 of the FEM (CAT) Rules 2000. This rule provided relaxation for users of international credit cards, allowing them to make transactions during their overseas visits without certain tax implications. However, this relaxation created a disparity in tax treatment between international credit card users and individuals using other payment methods such as debit cards, forex cards, and bank transfers.
4. To address this discrepancy and promote tax parity among different payment methods, the Ministry of Finance, in consultation with the Reserve Bank of India (RBI), made the decision to remove the relaxation provided to international credit card users. As a result, overseas credit card spending now falls under the LRS, which is a measure implemented by the RBI to regulate and monitor the remittance of funds by Indian residents.
5. By bringing international credit card spending under the LRS, the government aims to achieve a level playing field and equal tax treatment for all modes of foreign transactions. This change intends to curb excessive global spending by Indian overseas visitors and ensure that all forms of foreign transactions are captured under the LRS framework.

Controversy and Government Response

1. The government’s decision to include international credit card spending under the Liberalised Remittance Scheme (LRS) and implement a higher tax collected at source (TCS) rate has sparked controversy and generated significant public opposition. This controversy was amplified through social media platforms, with the issue trending on Twitter on May 18, shortly after the announcement. The primary concern expressed by the public was related to the applicability of TCS to small transactions under the LRS from July 2023. Many individuals voiced their disquiet over the potential financial burden that would be imposed on frequent travelers and those making international transactions during their overseas visits.
2. In response to the public outcry, the Ministry of Finance quickly addressed the concerns by issuing a list of frequently asked questions (FAQs). These FAQs aimed to provide clarity and rationale behind the decision to bring international credit card spending under the LRS.One of the key clarifications provided in the FAQs was the exemption from TCS for small transactions up to  ₹7 lakh per financial year. The government stated that no TCS would be collected on transactions below this threshold to avoid procedural ambiguity and alleviate the burden on individuals making lower-value transactions.
3. The government also emphasized that the change in the rules was made in consultation with the Reserve Bank of India (RBI) and was notified on May 16, 2023. They reiterated that the decision to include international credit card spending under the LRS and implement a higher TCS rate was taken to ensure tax parity and prevent money laundering. The government’s intention was to track high-value overseas transactions and discourage tax evasion. By addressing the concerns through the FAQs, the government aimed to provide clarity and alleviate the apprehensions surrounding the new regulations. While the controversy surrounding the change in rules persists, the government’s response attempted to address the public’s concerns and provide explanations for the rationale behind the decision.

Implications for the Public

The inclusion of international credit card spending under the Liberalised Remittance Scheme (LRS) and the implementation of a higher tax collected at source (TCS) rate have significant implications for the general public, particularly for individuals who frequently travel overseas and make international transactions. Let’s delve into these implications in more detail.

1. Increased Tax Liability: The implementation of a higher TCS rate, initially set at 20% from July 1, 2023, means that individuals using international credit cards for transactions outside of India will experience a higher tax liability. This can result in higher credit card bills and potentially block funds until the tax return is filed and the collected tax is adjusted. It is crucial for individuals to factor in this increased tax liability when planning their overseas expenditures.
2. Compliance Burden: The new regulations place a compliance burden not only on individuals but also on banks and credit card issuing institutions. Financial institutions must adapt their processes and systems to integrate data and facilitate the ease of filing income tax returns. Similarly, individuals need to be aware of the regulatory requirements and ensure compliance with the new rules to avoid any penalties or legal complications.
3. Financial Planning: With the introduction of the TCS on international credit card spending, individuals need to carefully plan their foreign remittances during overseas visits to ensure compliance with the regulations and avoid breaching any norms. It becomes essential to budget and manage expenses effectively to account for the increased tax liability. This may require individuals to reconsider their spending patterns and prioritize their expenditures while traveling abroad.
4. Impact on Travel Expenses: Individuals undertaking overseas trips exceeding Rs 7 lakh will fall under the LRS and attract TCS. This implies that the overall expenses of the tour will increase, as the additional tax burden needs to be factored into the travel budget. It is important for travelers to be aware of this change and adjust their financial plans accordingly to avoid any unexpected financial strain.
5. Financial Institutions’ Adaptation: The inclusion of international credit card spending under the LRS also poses challenges for banks and credit card issuers. These institutions must adapt their processes and systems to comply with the new regulations and ensure proper tax collection at source. This adaptation may involve system updates, customer communication, and coordination with tax authorities to streamline the implementation.

It is crucial for individuals to stay updated on the changes, consult with financial advisors if needed, and understand the implications of the new regulations on their financial planning and transactions. Adhering to the regulatory requirements and being proactive in managing finances will help individuals navigate the changes smoothly and ensure compliance with the updated rules. Get in touch with a Vakilsearch tax expert today and clarify your doubts.

Clarifications issued – FAQs

1. Impact on Specific Categories: The amendment primarily affects investments in assets, tour travel packages, and gifts to non-residents. The rates and thresholds for educational and medical expenses remain unchanged.
2. Tax Liability for Non-Taxpayers: It has been clarified that even if the Tax Collection at Source (TCS) is imposed on a person who is not a taxpayer, the 20% tax on presumed income will not be considered high.
3. Rationale for the Amendment: The amendment was introduced to address the issue of payments made using credit cards that should fall under the Liberalised Remittance Scheme (LRS). These payments were not previously considered within LRS limits due to the reliance on the erstwhile Rule 7.
4. Travel and Incidental Expenses: TCS on travel and incidental expenses related to education and medical treatment will be included within the rates and thresholds set for education and medical treatments themselves.
5. Business Visits and LRS: The FAQs clarify that LRS does not cover business visits where the expenses are borne by the employer. Such payments will be treated as residual current account transactions outside of the LRS.

Nature of Remittance	Upto 30 June 2023	From 1 July 2023
Medical treatment	5%	5%
Threshold (INR)	700,000	700,000
For Education (not out of loan funds)	5%	5%
Threshold (INR)	700,000	700,000
Education related spends (out of loan funds obtained from a financial institution)	0.50%	0.50%
Threshold (INR)	700,000	700,000
International spends on credit or debit cards	5%	20%
Threshold (INR)	700,000	700,000
Gifts to non-residents, investments in bonds, stocks or real estate, etc.	5%	20%
Threshold (INR)	700,000	NIL
Purchase of overseas tour travel package	5%	20%
Threshold (INR)	NIL	NIL

Rationale behind TCS Implementation

The rationale behind the implementation of Tax Collection at Source (TCS) on international credit card spending under the Liberalised Remittance Scheme (LRS) is rooted in several key objectives. The government aims to achieve transparency, equality in tax treatment, and enhanced oversight of foreign transactions. Let’s explore the rationale behind the TCS implementation:

1. Tax Parity and Equality: The government’s decision to impose TCS on international credit card spending is driven by the objective of establishing tax parity and equal treatment for different modes of foreign transactions. Previously, international credit card holders enjoyed exemptions, creating a disparity in tax treatment compared to users of other payment methods such as debit cards, forex cards, and bank transfers. By subjecting credit card spending to TCS, the government aims to eliminate this disparity and ensure equal tax obligations for all individuals making foreign transactions.
2. Preventing Tax Evasion: The implementation of TCS helps in preventing tax evasion and improving tax compliance in foreign transactions. By collecting tax at the time of the transaction, the government aims to discourage individuals from evading tax obligations on their overseas spending. This ensures that the appropriate taxes are collected upfront, minimizing the possibility of tax evasion and enhancing overall tax compliance.
3. Tracking High-Value Overseas Transactions: The inclusion of TCS allows for better tracking of high-value overseas transactions. The government aims to capture and monitor such transactions to ensure transparency and prevent illicit activities such as money laundering. By implementing TCS, the tax authorities can effectively trace and monitor the flow of funds for significant foreign expenditures, contributing to a more robust and transparent financial ecosystem.
4. Revenue Generation: The introduction of TCS on international credit card spending also serves as a means of generating revenue for the government. The higher TCS rate helps in boosting tax collections from foreign transactions, thereby contributing to the government’s revenue stream. This additional revenue can be utilized for various developmental initiatives and public welfare programs.

How the Change Affects Credit Card Users

The change in regulations, which includes international credit card spending under the Liberalised Remittance Scheme (LRS) and introduces a higher tax collected at source (TCS) rate, has significant implications for credit card users. Let’s explore how this change affects credit card users:

1. Increased Tax Liability: Credit card users making transactions outside of India with their international credit cards will now incur a higher tax liability due to the implementation of TCS. Initially set at 20% from July 1, 2023, the TCS rate will result in higher credit card bills for individuals. It’s important for credit card users to consider this increased tax liability when budgeting for their overseas expenditures.
2. Compliance Requirements: Credit card users will need to comply with the new regulations and ensure that they meet the necessary reporting and tax payment obligations. This may involve keeping track of their international transactions, maintaining proper records, and ensuring accurate reporting of their foreign expenditures during the income tax filing process. Credit card users will need to familiarize themselves with the updated rules to avoid any penalties or non-compliance issues.
3. Financial Planning: The change in regulations requires credit card users to incorporate the increased tax liability into their financial planning. It becomes crucial to budget and manage expenses effectively while considering the impact of the higher TCS rate. Credit card users may need to reassess their spending patterns, prioritize their expenditures, and make informed decisions to align with their financial goals and the updated tax obligations.
4. Impact on Travel Expenses: The change in rules will directly impact the overall expenses of credit card users who frequently travel abroad and make international transactions. Those individuals whose overseas trips exceed Rs 7 lakh will fall under the LRS and attract TCS. As a result, credit card users may experience an increase in the overall cost of their travel due to the additional tax burden. Careful financial planning is necessary to ensure that travel expenses remain within the desired budget.
5. Adapting to New Procedures: Credit card issuers and banks will need to adapt their processes and systems to comply with the updated regulations and ensure proper tax collection at source. Credit card users may experience changes in the way their transactions are processed, and they may receive additional communication or notifications from their card issuers regarding the revised tax requirements. It’s important for credit card users to stay informed about these changes and understand how they impact their credit card usage.

Integration Challenges for Financial Institutions

The recent change in regulations regarding international credit card spending and the implementation of a higher tax collected at source (TCS) rate pose integration challenges for financial institutions. Here are some of the key challenges they may face:

1. System Updates: Financial institutions, including banks and credit card issuers, will need to update their existing systems and processes to accommodate the changes in regulations. This includes integrating the necessary functionalities to calculate and deduct the higher TCS rate on international credit card transactions. System updates can be complex and time-consuming, requiring careful planning and coordination to ensure a smooth transition.
2. Data Integration: Financial institutions will need to integrate and synchronize data from various sources to accurately calculate and report TCS on international credit card transactions. This involves consolidating transaction data from credit card networks, merchants, and other sources to ensure proper tax collection at source. Data integration can be challenging, especially when dealing with large volumes of transactions and different data formats.
3. Reporting and Compliance: Financial institutions will have to enhance their reporting capabilities to comply with the updated regulations. They will need to generate accurate reports on TCS collections, maintain records of international credit card transactions, and ensure timely submission of relevant information to tax authorities. Compliance with reporting requirements is crucial to avoid penalties and legal repercussions.
4. Customer Communication and Education: Financial institutions will need to effectively communicate the changes to their customers and educate them about the implications of the new regulations. This includes providing clear and concise information about the higher TCS rate, its impact on credit card bills, and any procedural changes in international transactions. Customer communication and education are vital to ensure transparency, minimize confusion, and maintain customer satisfaction.
5. Training and Skill Development: The implementation of the updated regulations may require financial institutions to train their employees and enhance their skills and knowledge related to the changes. This includes training customer service representatives, tax compliance teams, and other relevant personnel on the new rules, reporting requirements, and customer communication strategies. Adequate training ensures that employees are well-equipped to handle customer queries, assist with compliance, and provide accurate information.
6. Testing and Quality Assurance: Financial institutions need to conduct thorough testing and quality assurance processes to ensure the accuracy and reliability of their systems and processes after the integration of the new regulations. Rigorous testing helps identify and rectify any technical issues, data inconsistencies, or compliance gaps before the changes are fully implemented. This ensures a seamless experience for customers and minimizes disruptions in service. Our tax expert will get in touch with you! Talk to CA today

Conclusion

In conclusion, the recent change in regulations regarding international credit card spending under the Liberalised Remittance Scheme (LRS) and the implementation of a higher tax collected at source (TCS) rate has significant implications for credit card users and financial institutions alike. The decision to include international credit card spending under the LRS aims to bring parity in tax treatment and curb increasing global spending by Indian overseas visitors. While the change is intended to promote transparency, equality, and compliance, it presents challenges and considerations for credit card users. They will now face higher tax liabilities and increased expenses on their international transactions. Careful financial planning, adherence to compliance requirements, and staying informed about the updated regulations are crucial for credit card users to navigate these impacts effectively. Financial institutions, on the other hand, are tasked with addressing integration challenges to accommodate the regulatory changes. System updates, data integration, reporting and compliance, customer communication, training, and testing are key areas that they need to focus on to ensure seamless operations and compliance with the new regulations. Overall, the implementation of the higher TCS rate and the inclusion of international credit card spending under the LRS bring about a shift in the landscape of overseas transactions. It is important for both credit card users and financial institutions to adapt to these changes, understand their implications, and take appropriate measures to ensure compliance, transparency, and smooth functioning in the realm of international credit card usage.

FAQs:

What is the LRS Scheme, and how does it apply to Forex credit card payments?

The LRS Scheme refers to the Liberalised Remittance Scheme, allowing Indian residents to send money abroad for various purposes. When it comes to Forex credit card payments, the LRS Scheme applies by enabling individuals to use it to settle outstanding balances on their international credit cards.

Can I use my Forex credit card for all international transactions under the LRS Scheme?

You can use your Forex credit card for eligible international transactions within the limits set by the LRS Scheme. However, it's essential to adhere to the specific guidelines and regulations governing such transactions.

What are the limits and guidelines for Forex credit card payments under the LRS Scheme?

Forex credit card payments under the LRS Scheme have predefined limits based on the Reserve Bank of India's regulations. These limits and guidelines dictate the maximum amount ($2,50,000 per person) which you can spend abroad using your credit card while adhering to legal norms.

Are there any reporting requirements for Forex credit card payments made under the LRS Scheme?

Yes, there are reporting obligations for Forex credit card payments conducted under the LRS Scheme, necessitating the disclosure of transactions to the authorised banks.

Can I use my Forex credit card for business-related transactions under the LRS Scheme?

Yes, you can use your Forex credit card for certain business-related transactions within the prescribed limits and guidelines of the LRS Scheme.