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Friends, it is that time of the Year, when summer vacations of the children have commenced, and travelling bags are being packed to make that much awaited vacation trip to your dream destination. If your dream destination happens to be outside India, then this Taxalogue is definitely for You. The tax professionals thinking of making business trips to Dubai, following the introduction of the UAE Corporate Tax w.e.f. 1.6.2023, will also find this article useful. So, lets begin our tax empowerment ride to make your overseas ride more cost economical.

Legislative Framework for TCS on Foreign Remittances

The Finance Act 2020 has inserted a new sub-section (1G) in section 206C of the Income Tax Act, stipulating the collection of Tax Collected at Source (TCS) by an Authorised Dealer (AD), on foreign remittances made by a Buyer, under the Liberalised Remittance Scheme (LRS) of RBI and on Overseas Tour Packages including overseas travel, hotel, lodging and boarding expenses.

Such TCS is to be collected by the AD at the time of debiting the amount payable by the buyer or at the time of receipt of such amount from the said buyer, by any mode, whichever is earlier.

For the purpose of Section 206C(1G), "authorised dealer" means a person authorised by the Reserve Bank of India under sub-section (1) of section 10 of the Foreign Exchange Management Act, 1999 (42 of 1999) to deal in foreign exchange or foreign security.

Therefore, the bankers through which the resident individual wires foreign remittance abroad, under LRS, the international debit/credit card/ forex card /travellers’ cheques issuing banks, the authorised money changers, the overseas tour operators, all will come within the definition of the ‘authorised dealer’ u/s 206C(1G), who are required to collect TCS on the specified foreign remittances done by the resident individuals, either at the time of such remittances or at the time of raising invoice/settlement of account of such buyers, whichever is earlier.

For the purpose of Section 206C(1G), "overseas tour programme package" means any tour package which offers 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.

Liberalised Remittance Scheme (LRS) of RBI

Under the Liberalised Remittance Scheme of RBI, Authorised Dealers may freely allow remittances by resident individuals up to USD 2,50,000 per Financial Year (April- March) for any permitted current or capital account transaction or a combination of both. The Scheme is not available to corporates, partnership firms, HUF, Trusts, etc.

It is mandatory for the resident individual to provide his/her Permanent Account Number (PAN) to make remittance under the Scheme and to furnish Form A2 for purchase of foreign exchange under LRS.

The Scheme is available to all resident individuals including minors. In case of remitter being a minor, the Form A2 must be countersigned by the minor’s natural guardian.

Remittances under the Scheme can be consolidated in respect of family members subject to individual family members complying with its terms and conditions. However, clubbing is not permitted by other family members for capital account transactions such as opening a bank account/investment, if they are not the co-owners/co-partners of the overseas bank account/ investment.

Investor, who has remitted funds under LRS can retain, reinvest the income earned on the investments. The received/realised/unspent/unused foreign exchange, unless reinvested, shall be repatriated and surrendered to an authorised person within a period of 180 days from the date of such receipt/ realisation/ purchase/ acquisition or date of return to India, as the case may be.

Permissible Current Account Transactions under LRS

As per Rule 5 of the FEM (CAT) Rules, 2000, resident individuals can avail foreign exchange facility for the following purposes, as detailed in Schedule III of the Rules, within the permissible LRS limit of USD 2,50,000, in a financial year, without the prior approval of RBI.

• Private visits to any country (except Nepal & Bhutan);

• Gift or Donation;

• Going abroad for Employment;

• Emigration;

• Maintenance of Close Relatives Abroad;

• Business Travels including Conferences;

• Education Abroad;

• Medical Treatment Abroad;

• Any other Current Account Transaction.

Permissible Capital Account Transactions under LRS

• opening of foreign currency account abroad with a bank;

• acquisition of immovable property abroad, Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI), in accordance with the    provisions contained in Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas    Investment) Regulations, 2022 and Foreign Exchange Management (Overseas Investment) Directions, 2022;

• extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are relatives as defined in Companies Act, 2013.

Budget 2023 Amendments for TCS u/s 206C(1G)

The Finance Act 2023 has increased the TCS rate on foreign remittances made under LRS (other than towards medical treatment and education abroad), like investments in shares, bonds and securities abroad, donations, gifts, and living expenses of relatives abroad and on the overseas tour packages, from the existing 5% to 20%, w.e.f. 1.7.2023 and has also removed the existing threshold exemption limit of Rs. 7 lakhs in respect of such remittances.

The rate of TCS for foreign remittances for education and medical treatment abroad has been kept same at 5% and for education abroad through loan from approved financial institutions at 0.5%, respectively, for remittances in excess of Rs 7 lakhs, in a financial year.

The TCS rate of 5% is also applicable on LRS spends made directly to the foreign medical/educational institutions towards their fees and also on the indirect travel and incidental expenses related to education and medical treatment abroad, subject to the furnishing of documentary evidences.

Foreign Spends Made through International Credit Cards brought under TCS Ambit

The payments made by resident individuals, through international credit cards, while on visits abroad, had been kept outside the ambit of LRS limit of USD 2,50,000 and incidental collection of TCS, by virtue of Rule 7 of FEM(CAT) Rules, 2000.

The said Rule 7 has now been omitted w.e.f. 16.5.2023, with a view to ensure uniformity and equity in the treatment of modes of drawl of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits.

W.e.f. 16.5.2023, international credit card payments, made by resident individuals, on their foreign visits, are also counted in the threshold permissible LRS limit of USD 2,50,000 per year.

Accordingly, TCS rate on such international credit card payments made on or after 16.5.2023 will be 5% upto 30.6.2023 and 20%/5% w.e.f. 1.7.2023.

A threshold exemption limit of Rs 7 lakhs has now been provided by CBDT Notification dated 19.5.2023, for payments made through international credit and debit cards, by resident individuals, while on their visits abroad. However, such threshold exemption limit of Rs 7 lakhs has not been specified in respect of foreign spends through Forex Cards, Travellers Cheques and direct foreign exchanges from authorised money changers, while on visits abroad.

Amended TCS Provisions u/s 206C(1G) At a Glance

I) TCS on Foreign Remittances towards Education Abroad

II) TCS on Medical Treatment Abroad

III) TCS on Foreign Remittances for Going abroad on Employment & Emigration

IV) TCS on Sending Gifts Abroad

V) TCS on Investments in Shares, Bonds, Securities & Real Estate Abroad & Making Donations abroad

VI) TCS on Business Trips Abroad

VII) TCS on Personal Visits Abroad

* Important Points for Consideration in respect of Foreign Travel 

i) If a resident individual directly purchases air tickets in respect of his/her foreign travel from various flights websites like Air India, Vistara, Indigo etc. then no TCS is applicable on such air tickets.

ii) Similarly if hotel bookings for foreign stay are directly done through respective hotel websites, then also currently no TCS is applicable.

iii) Further, where foreign tour operators purchase tour packages from Indian Tour operators and sells the same to non resident Indians, then also TCS is not applicable on such overseas tour purchases by foreign tour operators from Indian tour operators, as per CBDT Notification.

iv) If a resident individual, while on a visit abroad, purchases an overseas tour package or makes any spends towards his ongoing foreign travel through International Debit/Credit Card, then threshold exemption limit of Rs 7 lakhs as per CBDT Notification dated 19.5.2023, is applicable. 

Is the Rs. 7 Lakh Exemption Threshold Limit Qua the Remitter or Qua the Authorised Dealer?

The exemption threshold limit of Rs. 7 lakhs in respect of LRS remittances towards medical treatment and/or education abroad and/or international debit/credit card payments, is to be considered qua the resident individual (remitter) and not qua the TCS collector or qua the Debit/Credit Card.

The aggregate LRS spends of resident individuals, in a financial year, are compiled and monitored by RBI, based on PANs of such individuals.

So, if a resident individual is making LRS spends through more than one authorised dealer/banker, or more than one international debit/credit card, then the threshold exemption limit of Rs 7 lakhs in a year, will be considered in respect of all such authorised dealers/bankers or debit/credit cards, taken together, and not per authorised dealer/banker/debit/credit independently.

Is TCS applicable on purchase of goods and services, from foreign websites, while remaining in India?

Payments made by an individual [corporates are in any case outside the ambit of TCS u/s 206C(1G)] through International Credit Cards or Debit cards, towards subscription of various foreign domiciled digital platforms like linked in, Spotify, ChatGPT, Google etc., and towards purchase of goods from foreign ecommerce websites, while remaining in India, are not covered under LRS remittances (as per Rule 5), neither are these towards overseas tour packages, so TCS u/s 206C(1G) is not applicable.

The real purport of the clarification given in MoFs’ FAQ that payments made through international debit/credit cards within India are already covered under Rule 5 of FEM(CAT) Rules 2000, was that TCS will be applicable if such payments have been made towards the listed 8 categories of specified foreign remittances viz. private visits to countries other than Nepal & Bhutan, foreign gifts or donations, going abroad for employment, emigration, maintenance of close relatives abroad, foreign travel, education abroad, medical treatment abroad, and any other current a/c transaction. So, purchase of goods & services, within India from foreign websites, other than these specified categories, is not liable for TCS u/s 206C(1G).

Is Credit of TCS Available?

The payment of TCS is not a final Tax.

If the TCS payee is a taxpayer, he/she can claim credit for the TCS against regular income and adjust it against the advance tax/ self-assessment tax, while filing the Return of Income.

However, if the TCS payee is not required to pay any income tax, then the only option to claim the refund of TCS is by filing the Return of Income, and claiming the TCS refund in such return of income.

The interest on such refund, will be calculated only from the beginning of next financial year, till the grant of such refund and the interest rate on such refund is 6% only u/s 244A of the Income Tax Act.

Practical Example of TCS u/s 206C(1G)

Mr. Srinivasan makes foreign remittance of Rs. 5 lakhs towards medical treatment of his wife in USA on 1.7.2023, by exchanging equivalent USD from an authorised money changer. 

On 31.8.2023, he makes further foreign remittance of Rs. 2 lakhs through his banker, towards education fees of his daughter who is studying in UK and additionally incurs an expenditure of Rs. 1 lakh towards the hostel fees of her daughter, through his international credit card with HDFC Bank.

Mr. Srinivasan makes foreign remittance of Rs. 3 lakhs towards investments in US Stocks through his investment banker on 30.9.2023. On 1st January, 2024, he books an overseas tour package of Rs. 4 lakhs to Europe from a Tour Operator.

In this example, the threshold exemption limit of Rs 7 lakhs will be considered for his LRS remittances in respect of Rs. 5 lakhs towards medical treatment of his wife, Rs 2 lakhs towards education fees and Rs. 1 lakh towards the hostel fees of his daughter. So, the LRS remittance of Rs 1 lakh in excess of the threshold exemption limit of Rs 7 lakhs will be liable for TCS collection by the HDFC bank @ 5%, i.e., Rs. 5,000/-, subject to the furnishing of hostel fees receipts.

The remittances of Mr. Srinivasan of Rs. 3 lakhs towards investments in US Stocks and overseas tour package of Rs. 4 lakhs, will be liable for TCS collection @ 20% i.e., Rs. 60,000 by the investment banker and Rs. 80,000 by the tour operator respectively, either at the time of remittance or at the time of debiting the amount payable, whichever is earlier, and without any threshold exemption limit.

Mr. Srinivasan can take the credit of this total TCS amount of Rs. 1,45,000/-, while depositing his advance tax and self-assessment tax as per his return of income for the FY 2023-24, or can claim a refund of this amount, if there is no income tax liability. However, interest on such refund, will be calculated only from the beginning of next FY 2024-25, till the grant of such refund.

Parting Tip for Making Your Foreign Trip Cost Effective

Friends, if You are planning to make your foreign trips abroad on or after 1.7.2023, it is advisable to make your corresponding foreign remittances towards such foreign trips, on or before 30.6.2023 only, and to ask your authorised dealers to collect TCS on the same on or before 30.6.2023, to avail the benefit of reduced TCS rate of 5% vis-à-vis the increased TCS rate of 20%, applicable w.e.f. 1.7.2023.

It is pertinent to mention here that a resident individual can purchase foreign currency from the authorised money changer, 60 days before undertaking his/her foreign travel. So, if anyone intends to make a foreign visit in July or August 2023, then now is the right time to purchase the required foreign currency so as to avail the benefit of reduced TCS rate of 5% vis-a-vis 20%. 

Note: For any related queries, the author of this Article and the Founder Director of TaxAaram India Pvt Ltd, Shri Mayank Mohanka, may be reached at mayankmohanka@gmail.com

[This Article has also been published in Taxmann with the Citation [2023] 151 taxmann.com 88 (Article).