Explore the latest FEMA Amendment - Forex Credit Card Payments now included under the RBI's LRS Scheme. Gain insights into the relief provided for payments up to ₹7 lakhs and how it impacts your overseas transactions. Learn how to navigate these changes effectively.

1. The Finance Ministry has modified the Foreign Exchange Management Act (FEMA) regulations, as stated in a notification issued on May 16, 2023, thus a FEMA Amendment has happened. This update, made in partnership with the Reserve Bank of India (RBI), eliminates Rule 7 from the FEM (CAT) Rules 2000. As a result, the earlier flexibility extended to international credit card users when transacting overseas has been withdrawn.
2. This modification implies that any spending on overseas international credit cards now falls under the Reserve Bank of India’s liberalised remittance scheme (LRS). This scheme allows Indian residents to spend up to $2.50 lakh per financial year outside India without the RBI’s prior approval.
3. The main goal of incorporating overseas credit card spending into the LRS is to establish an equal tax treatment for remittances made with debit and credit cards, and to control the growing global expenditure by Indians travelling abroad. ABP Live reported that global spending by Indian international travellers increased from $12.68 billion in 2020-21 to $19.61 billion in 2021-22, and then to $24 billion in 2022-23.
4. The government has declared that all spending on international credit cards outside India will now be subject to the LRS, attracting a higher tax of 20 percent. This adjustment could significantly affect frequent overseas travellers making international transactions. The move met with resistance from the public, prompting the ministry to issue a list of Frequently Asked Questions (FAQs) the day after the rule change to clarify the reasons behind including international credit cards in the liberalised remittance scheme.
5. Previously, people could use international debit cards, credit cards, and other methods for transactions during their trips abroad. International credit card users were exempt from the Tax Collected at Source (TCS) under the old Rule 7 of FEMA. In contrast, payments made with international debit cards, forex cards, and bank transfers were part of the Liberalised Remittance Scheme (LRS). Also, all transactions made on international credit cards within India were governed by Rule 5 of the FEM (CAT) Rules 2000 and fell under the LRS. ‘Talk to CA’, for a better understanding on this FEMA rules.
6. However, the new notification created a stir on social media. It was a trending topic around the time of the announcement and became the most talked-about issue on Twitter on May 18. There was public concern about the application of TCS to small transactions under the LRS, starting in July 2023. The government, which initially stood by its decision, later clarified that no TCS would be levied on smaller transactions up to ₹7 lakh to prevent any procedural confusion.
7. Now, an individual can make payments up to ₹7 lakh per financial year using their international debit and credit cards without it being subject to LRS limits or attracting TCS. However, transactions exceeding ₹7 lakh during overseas trips will be part of the LRS. The TCS exemption only applies to overseas spending via international debit and credit cards and is not applicable for payments made from within India. Necessary amendments to FEMA rules will be issued separately by the government.
8. According to the government, this decision was made in consultation with the RBI and notified on May 16, 2023. The new tax rate will be effective from July 1, 2023. The RBI had also advised the government multiple times to remove the differential treatment between international debit and credit card expenditures. This recommendation aimed at promoting uniformity and equality in foreign exchange withdrawal methods and capturing total expenditure under the LRS.

What is the Current Tax Collected at Source (TCS) Rate?

Previously, the TCS rate stood at 5 percent. However, the Finance Minister proposed in the 2023 Budget Speech to raise the TCS rate to 20 percent on purchases of overseas tour packages and funds remitted under the Liberalised Remittance Scheme (LRS) for the fiscal year 2023-24. For foreign remittances exceeding Rs 7 lakh used for educational purposes or medical treatments, the TCS rate remains at 5 percent.

Why the TCS?

The government claims that this measure is to ensure equality among users of international credit and debit cards, forex, and bank transfers. As per the ministry, TCS implementation is a crucial step towards a fair and transparent payment landscape. Tax authorities have observed some individuals making remittances under the LRS that far exceed their declared income.

The government disseminated a series of tweets and videos to explain TCS and the LRS. They claim this change will combat money laundering and allow tracking of high-value overseas transactions. However, this doesn’t apply to payments made for transactions involving foreign goods and services from within India. The Finance Secretary states that TCS will be adjusted seamlessly and taxpayers can claim it during income tax return (ITR) filing. The TCS isn’t applicable to payments below ₹7 lakh, business trips, and payments for education and medical purposes.

How Will it Impact the Public?

Experts believe the new rule could impose compliance burdens on card-issuing banks and procedural burdens on consumers for overseas transactions exceeding ₹7 lakh. According to a reputable source, individuals might face higher credit card bills. While the government intended to standardise tax treatment of remittances across international credit and debit cards and forex cards, the reality may be different. From July 2023, all Indian visitors abroad will face more expensive foreign transactions and additional financial burdens for payments exceeding ₹ 7 lakh during overseas travel, which could raise overall travel expenses.

It is now advisable for travellers to carefully plan their foreign remittances to comply with the regulations without breaking any rules. This change will also impact banks and credit card issuers, who now must adjust their operations to consolidate data and facilitate easier income tax return filing.

Why Choose Us?

Choosing Vakilsearch’s Chartered Accountant (CA) for your financial needs brings several advantages:

1. Expert Compliance Guidance: Our CA’s are well-versed with the latest regulatory changes and can guide you through the complexities of these new rules, ensuring that you remain compliant while conducting your overseas transactions.
2. Comprehensive Tax Planning: Our CA’s specialize in tax planning and can help you optimize your finances to minimize tax liability within the bounds of the law, particularly important in light of the new rules impacting overseas transactions.
3. Clarifying TCS Implications: Understanding the implications of Tax Collected at Source (TCS) on various transactions can be daunting. Our CA’s can help clarify these implications and help you understand how the new TCS rates affect your overall tax obligations.
4. Professional Tax Filing Assistance: Accurate tax reporting is crucial. Our CA’s are skilled in tax preparation and can help you accurately report these transactions and the deducted tax at source on your income tax return.
5. Personalized Consultation and Advice: Every financial situation is unique. Our CA’s provide tailored advice on managing your foreign remittances and overseas expenses under the new rules. We work closely with you to develop optimal financial strategies within the regulatory framework.
6. Effective Liaison with Financial Institutions: Our CA’s can act as a bridge between you and your bank or credit card provider, ensuring these institutions are adhering to the new rules and managing your accounts and transactions appropriately.

FAQs

When was FEMA amended?

The Foreign Exchange Management Act (FEMA) has been amended several times since its enactment in 1999. It is advisable to get in touch with our experts for the most accurate and up-to-date information on FEMA amendments.

What is the Foreign Exchange Management Act 1999 Amendment?

The Foreign Exchange Management Act (FEMA) 1999 has undergone multiple amendments to enhance and modify its provisions related to foreign exchange transactions, regulations, and enforcement. These amendments aim to facilitate trade, investments, and foreign exchange management in accordance with the evolving economic and financial landscape.

Which Act was replaced by FEMA?

The Foreign Exchange Regulation Act (FERA) of 1973 was replaced by the Foreign Exchange Management Act (FEMA) in 1999. FERA was a regulatory framework that governed foreign exchange transactions and currency regulations in India. FEMA introduced significant changes and modernized the foreign exchange management system to align with the economic liberalization policies and facilitate smoother transactions and investments.

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• Laws Governing FEMA
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