FEMA tweaks to bring parity in tax treatment of card spending overseas

The finance ministry on Thursday said the changes in FEMA rules, which brings overseas international credit card spending under RBI's liberalised remittance scheme (LRS), are intended to bring parity in tax treatment of remittances using debit and credit cards.

The ministry said since credit card spending overseas has now been brought under LRS, such remittances would be liable to tax collected at source (TCS) at applicable rates. If the TCS payee is a taxpayer, he or she can claim credit and adjust it against his/her I-T or advance tax liability.

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

A day after amending the Foreign Exchange Management (Current Account Transaction) Rules, the ministry issued a list of FAQ (frequently asked questions) detailing the reasons for inclusion of foreign spending using credit cards.

It said that instances came to notice of the tax authorities that remittances under LRS by some individuals were 'disproportionately high' to their disclosed sources of income.

A person on overseas visit can use international debit cards, international credit cards or other methods for undertaking current account transactions.

Although the payments by debit cards were covered under the LRS, expenditures through credit cards were not accounted for under the specified LRS limit, which has led to some individuals exceeding the LRS limits, the ministry said.

This exemption to international credit cards was provided under erstwhile Rule 7 of FEMA Rules.

Data collected from top money remitters under LRS also revealed that international credit cards were being issued with limits in excess of the present LRS limit of USD 2.50 lakh.

The ministry further said that the Reserve Bank of India too had on numerous occasions written to the government pointing to the need to remove the differential treatment to debit and credit card spendings.

"The differential treatment between debit cards and credit cards needed to be removed in the interest of uniformity and equity in the treatment of modes of drawal of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits," the ministry said.

Under the RBI's LRS scheme, an individual can remit up to USD 2.5 lakh annually overseas without approval of the RBI. Remittances beyond the USD 2.5 lakh or its equivalent in foreign currency would require approval from the RBI.

In 2021-22, a total of USD 19.61 billion was remitted under LRS, up from USD 12.68 billion in 2020-21. In 2022-23, it rose to more than USD 24 billion, of which overseas travel accounted for more than half of the total.

The FAQ also clarified that TCS of 5 per cent will be levied on expenses exceeding Rs 7 lakh towards medical treatment and education, while other expenses including investment in real estate, foreign tour and travel would attract 20 per cent.

For those availing loans for overseas education, a lower TCS rate of 0.5 per cent would be levied above the Rs 7-lakh threshold.

The ministry said the primary impact of higher TCS rate would only be on investment in assets such as real estate, bonds, stocks outside India by HNI and tour travel packages or gifts to non-residents.

"If the TCS is of a person not being a taxpayer, then the 20 per cent rate on such presumed income is not high. The tax rate slab of 20 per cent starts in the new regime for incomes over Rs 12 lacs and is 30 per cent for incomes over Rs 15 lacs," the ministry said.

The ministry also clarified that LRS does not cover business visits of an employee. When an employee is being deputed by an entity, such expenses will be treated as residual current account transactions outside LRS and may be permitted by the AD without any limit, subject to verifying the bona fide of the transaction, it said.