Direct Tax Alert

Background:

The Finance Act 2020 introduced section 206C(1G) in the Income-tax Act, 1961 (IT Act) w.e.f. 1 October 2020 to bring remittances made under the Liberalised Remittance Scheme¹ (LRS) and on sale of overseas tour packages within the purview of the Tax Collected at Source (TCS). As per the section, TCS shall be collected on foreign remittance as tabulated below:

Table 1

Sr.No.	Type of Remittance	Rates in force
i.	Any remittance other than an overseas tour package	No TCS, if remittance is less than INR 0.7mn
ii.	Towards education abroad and is out of a loan obtained from any financial institution as defined in section 80E of the IT Act	0.5% of the amount or aggregate amount exceeding INR 0.7mn
iii.	Any remittance other than overseas tour package and towards education abroad other than (ii) above	5% of the amount or aggregate amount exceeding INR 0.7mn
iv.	Overseas tour package	5% without any threshold limit

In order to increase TCS on certain foreign remittances and on the sale of overseas tour packages, the Finance Act 2023 amended section 206C(1G) of the IT Act w.e.f. 1 July 2023. The revised rates and limits are tabulated below:

Table 2

Sr.No.	Type of Remittance	Rates in force
i.	Any remittance other than an overseas tour package	No TCS, if remittance is less than INR 0.7mn
ii.	Towards education abroad and loan is obtained from any financial institution as defined in section 80E of the IT Act	0.5% of the amount or aggregate amount exceeding INR 0.7mn
iii.	Towards education abroad other than (ii) above and for the purpose of medical treatment	5% of the amount or aggregate amount exceeding INR 0.7mn
iv.	Overseas tour package	20% without any threshold limit
v.	Any other case	20% without any threshold limit

Further, the Ministry of Finance (MoF) issued a notification² dated 16 May 2023 through which Rule 7³ of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 (FEM(CAT) Rules) was omitted. Therefore, any remittance made by a person through his/her international credit card during a visit abroad shall form part of his/her LRS limits and be liable for TCS at 20%. Further, as per the FAQs issued by the MoF on 18 May 2023, the reason cited for the aforesaid omission was that due to exemption granted under Rule 7 of the FEM(CAT) Rules, expenditures through international credit cards were not accounted for under the LRS limit, which led to some individuals exceeding the LRS limits. Another reason being instances coming to notice of MoF where the LRS payments were disproportionately high in comparison to the disclosed income of the person. However, owing to several concerns raised by stakeholders and to avoid any procedural ambiguity, the MoF⁴ decided that any payments by using international credit cards will be excluded from the LRS limits and hence, will not attract TCS. The changes suggested in the notification dated 16 May 2023 by MoF have now been postponed for the time being. Comments were received about the practical difficulties that may arise from the removal of the threshold for Lto RS payments other than for education and medical treatment. Financial Institutions being key stakeholders have desired more time to modify their current IT systems to address issues arising from the implementation of the TCS provision on credit card transactions. In order to address this issue and remove difficulty in the implementation of changes, the Central Board of Direct Taxes (CBDT) has recently issued a press release⁵ and circular⁶. We at BDO in India, have analysed and summarised the said press release and circular and provided our comments on its impact hereunder:

Press Release:

Threshold of INR 0.7mn per FY per individual shall be restored for TCS on all categories of LRS (other than overseas tour package) payments, through all modes of payment, regardless of the purpose.
Increase in TCS rates to apply from 1 October 2023- The increase in TCS rates by Finance Act 2023 (kindly refer to table 2 above), which were to come into effect from 1 July 2023 shall now come into effect from 1 October 2023. Till 30 September 2023, rates prior to amendment by the Finance Act 2023 (kindly refer to Table 1 above) shall continue to apply.
There shall be no TCS on expenditure (other than overseas tour package) under LRS up to INR 0.7mn, irrespective of the purpose.
No TCS shall be applicable on expenditure through international credit cards while being overseas till further orders.

Circular:

Section 206C(1-I) of the IT Act provides that in case any difficulty arises in giving effect to the provisions of section 206C(1G) of the IT Act, the CBDT can issue guidelines to remove such difficulty. Accordingly, the following guideline is issued by CBDT:

1. Whether payment through an overseas credit card would be counted in LRS?

The classification of the use of international credit cards while being overseas, as LRS is postponed. Therefore, no TCS shall be applicable on expenditure through international credit cards while being overseas till further order.

2. Whether threshold of INR 0.7mn, for TCS to become applicable on LRS, applies separately for various purposes or is it a combined threshold? For example, if a remittance of INR 0.7mn under LRS is made in an FY for education purposes and other remittances in the same FY of INR 0.7mn is made for medical treatment and INR 0.7mn for other purposes, whether the exemption limit of INR 0.7mn shall be given to each of the three separately?

The threshold of INR 0.7mn for LRS is a combined threshold irrespective of the purpose of the remittance (other than the overseas tour package). Section 206C(1G) of the IT Act states that the TCS is not required if the amount or aggregate of the amounts being remitted by a buyer is less than INR 0.7mn in an FY. The amendment by the Finance Act 2023 has only restricted it to education and medical treatment purpose. The press release dated 28 June 2023 has restored the old position and the threshold continues to apply for INR 0.7mn in an FY, irrespective of the purpose. Thus, in the given example, TCS shall be applicable as tabulated below:

Remittances under LRS during FY 2023-24	TCS
First INR 0.7mn remittance for education purposes (or for that matter any purpose)	No TCS
Remittances beyond INR 0.7mn, if on or before 30 September 2023	TCS at 5% (irrespective of the purpose unless it is for education purposes financed by a loan from a financial institution when the rate is 0.5%)
Remittances beyond INR 0.7mn, if on or after 1 October 2023	TCS at 0.5% (for education purposes financed by a loan from a financial institution); TCS at 5% (for education or medical treatment); and TCS at 20% (for other purposes).

3. Since there are separate TCS rates on LRS for the first six months and the next six months for FY 2023-24, whether the threshold of INR 0.7mn, for TCS to become applicable on LRS, apply separately for each six months?

The threshold of INR 0.7mn, for the TCS to become applicable on LRS, applies for the full FY. If this threshold has already been exhausted then all subsequent remittances under LRS irrespective in the first half or in the second half, would be liable for TCS at applicable rates.

4. Whether the threshold of INR 0.7mn for TCS to become applicable on LRS is a qua authorised dealer (AD)? If not, how will AD know about the earlier remittances by that remitter through some other AD?

The threshold of INR 0.7mn for LRS is qua remitter and not qua AD. This is clear from section 206C(1G) of the IT Act which states that the TCS is not required if the amount or aggregate of amounts being remitted by a buyer is less than INR 0.7mn in a FY.
The details of earlier remittances under LRS by the remitter during the FY may be taken by the AD through an undertaking at the time of remittance till the facility to provide real-time updates of remittance under LRS by remitter is developed by the RBI.
If the AD correctly collects the tax at source based on the information given in the undertaking, he will not be treated as an “assessee in default”. However, in case of false information in the undertaking, appropriate action may be taken against the remitter under the IT Act.
The same methodology of taking an undertaking from the buyer of an overseas tour program package may be followed by the seller of such package.

5. Whether threshold of INR 0.7mn for remittance under LRS for TCS to become applicable and another threshold of INR 0.7mn for purchase of overseas tour program package for TCS at 5% apply independently?

Yes, these two thresholds apply independently. For LRS, the threshold of INR 0.7mn applies to make TCS applicable. For the purchase of an overseas tour program package, the threshold of INR 0.7mn applies to determine the applicable TCS rate as 5% or 20%.

6. During the FY, a resident individual spends INR 0.3mn for the purchase of an overseas tour program package from a foreign tour operator and remits money which is classified under LRS. There is no other remittance under LRS or purchase of an overseas tour program. Whether TCS is applicable?

In case of the purchase of an overseas tour program package which is classified under LRS, TCS provision for purchase of overseas tour program package shall apply and not TCS provisions for remittance under LRS. Further, for the purchase of an overseas tour program package, the threshold of INR 0.7mn for the applicability of TCS does not apply. The tax shall be collected by the seller at 5% since the total amount spent on the purchase of an overseas tour program package during the FY is less than INR 0.7mn.

7. What is the scope of remittance under LRS for medical treatment/ education purposes?

As per the clarification by the Reserve Bank of India (RBI), remittance for the purposes of medical treatment and education shall include:

Medical treatment	Education
i. Remittance for purchase of tickets of the person to be treated medically overseas (and his attendant) for commuting between India and the overseas destination; ii. His medical expense; and iii. other day-to-day expenses required for such purpose.	i. Remittance for purchase of tickets of the person undertaking study overseas for commuting between India and the overseas destination; ii. The tuition and other fees to be paid to the educational institute; and iii. Other day-to-day expenses required for undertaking such study.
RBI Master Direction for LRS (under the Purpose Group Name “Travel”)
Code S0304 pertains to travel for medical treatment. This code covers the transactions which are related to health services acquired by residents travelling abroad for medical reasons, which includes medical services, other healthcare, food, accommodation, and local transport transactions.	Code S0305 pertains to travel for education (including fees, hostel expenses etc.). This code covers education-related services such as tuition, food, accommodation, local transport, and health services acquired by resident students while residing overseas.
RBI Master Direction for LRS (under the Purpose Group Name “Personal, Cultural and Recreational services”)
Code S1108 covers transactions for health services rendered remotely or on-site (i.e., no travel by service recipient is involved). This cover services from hospitals, doctors, nurses, paramedical and similar services, etc.	Code S1107 covers transactions for education (e.g., Fees for correspondence courses abroad) where the person receiving education does not travel overseas.
TCS provision for medical treatment purposes would apply when the remittance is under code S0304 or S1108.	TCS provision for education purposes would apply when remittance is under code S0305 or S1107.

8. What needs to be included in a package to qualify purchase of an overseas tour program package?

The term ‘overseas tour program package’ is defined as any tour package which offers a visit to a country or countries or territory or territories outside India and includes expenses for travel or hotel stay or boarding or lodging or any other expenditure of similar nature or in relation thereto. To qualify as an ‘overseas tour program package’, the package should include at least two of the following:

International travel ticket,
Hotel accommodation (with or without food)/boarding/lodging,
Any other expenditure of similar nature or in relation thereto.

BDO in India comments

This is a welcome circular by CBDT as it provides much-needed clarity to taxpayers and addresses various procedural issues along with giving additional time to relevant stakeholders for developing and implementing a robust mechanism to collect taxes. While several issues have been clarified, certain issues still persist that need to be clarified. For instance, in FAQ4 above, it is clarified that in case any false information is provided in the undertaking, appropriate action may be taken against the remitter under the IT Act. However, clarity is required as to what kind of penalty will be levied. In FAQ 6 above, it is clarified that foreign tour operator is required to collect TCS at 5% up to INR 0.7mn and 20% thereafter. However, clarity is required as to how TCS will be collected by such overseas operator with no taxable presence in India.

¹ Under LRS of the Reserve Bank of India, an Indian individual resident in India as per the Foreign Exchange Management Act, 1999 is permitted to remit outside India fund up to USD 0.25mn per FY for any permitted current account or capital account transaction.

² Notification GSR 369(E), dated 16 May 2023.

³Rule 7 of the FEM(CAT) Rules exempted the use of international credit cards from the LRS for payments by a person towards meeting expenses while such a person is on a visit outside India.