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LRS outflows drop by 37.68% in October after higher tax levy

With banks implementing the government’s decision to levy higher Tax Collection at Source (TCS) rates on payments under the Liberalised Remittance Scheme (LRS) from October 1, remittances fell by 37.68 per cent to $2.176 billion during the month from $3.492 billion in September.

The higher TCS rates of up to 20 per cent are applicable on various international spends such as overseas tour packages which include travel related to medical treatment, business, education, pilgrimage, personal gifts and donations, family maintenance and investments. Remittances were $3.379 billion in August, $2.359 in July and $3.890 billion in June, Reserve Bank of India data shows.

According to RBI data, remittances for travel purpose declined by 22.49 per cent to $1.368 billion in October 2023 from $1.765 billion in the previous month. Outflows for maintenance of close relatives declined to $206.16 million in October from $559.79 million in September and for study purposes fell to $269.19 million from $396.08 million.

RBI data shows that remittances for investment in equity and debt plunged to $83.86 million in October from $208.45 million in the previous month.

The TCS was originally supposed to be implemented from July 1, 2023 but the decision was postponed to October 1 following resistance from customers and banks having asked for time to get their systems ready. Banks and credit card networks had raised concerns regarding the implementation of the TCS on international credit card payments given the extensive tweaks required to banks’ information technology infrastructure needed.

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Under the LRS, all resident individuals, including minors, can remit up to $250,000 (approximately Rs 2.07 crore) abroad per year without prior approval from the RBI. As per the proposed TCS rates under the LRS, overseas tour packages attract TCS of 20 per cent from October 1, compared to 5 per cent. However, TCS is not being levied on credit card spending abroad. “It (TCS on international credit card spends) is not being implemented from October 1. The decision has been put in abeyance,” said an official of a private bank. On International spends through credit cards, HDFC Bank said in a communication to account holders, “the classification of use of international credit card while being overseas, as LRS is postponed. Therefore, no TCS shall be applicable on expenditure through international credit card while being overseas till further order.”

However, for education where the source of fund is a loan, there is no TCS for less than Rs 7 lakh per individual per annum; for amounts equal to or more than Rs 7 lakh, the applicable TCS is the same at 0.5 per cent. For education purposes where the source is self-funding, for amounts less than Rs 7 lakh no TCS is levied, but for amounts of Rs 7 lakh and above, TCS rate continues to be 5 per cent. The government had said the decision to defer levying higher TCS rates was taken after discussions with various stakeholders. It was also aimed at giving banks and card network providers adequate time to put in place the requisite IT based solutions.

Travel accounts for more than 50 per cent of the total remittances. In 2022-23, travellers took out $13.66 billion under LRS.

The Budget 2023-24 had proposed hiking the TCS rate to 20 per cent from 5 per cent above Rs 7 lakh threshold for all purposes other than education and medical treatment. Also, for overseas tour packages, the government had proposed hiking the TCS rate to 20 per cent from 5 per cent, without any threshold, with effect from July 1. On May 16, the Centre amended rules under the Foreign Exchange Management Act (FEMA), bringing international credit card spends under the LRS. As a consequence, spending on international credit cards would have then attracted a higher rate of TCS at 20 per cent from July 1. However, on May 19, the government clarified that any payments by an individual using their international debit or credit cards up to Rs 7 lakh per financial year will be excluded from the LRS limits and hence, will not attract any TCS. The government then postponed the implementation to October 1, 2023.

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