New Rules by Finance Ministry: The Finance Ministry has announced new rules aimed at bringing uniformity in the tax aspects of the amount spent abroad using debit and credit cards. The purpose behind changing the Foreign Exchange Management Act (FEMA) law is to include expenses incurred from International Credit Cards under the Liberalized Remittance Scheme (LRS). This move will ensure consistency in the taxation process.
In a statement released on Thursday, the Finance Ministry highlighted that spending abroad through credit cards has been incorporated into the LRS scheme of the Reserve Bank of India (RBI). These changes have been implemented through the Foreign Exchange Management (FEMA) Amendment Rules, 2023.
New Tax Rates Effective from July 1
Starting from July 1, there will be new tax rates applied on expenses made while traveling abroad. This will be done through the implementation of “Tax Collection at Source” (TCS) at the applicable rates. If the person paying the TCS is a taxpayer, they can claim credit or set-off against their income tax or advance tax liabilities.
As per the proposal in this year’s budget, the TCS rate on foreign tour packages and money sent abroad under the Liberalized Remittance Scheme (LRS) will be increased from five percent to 20 percent. This change will take effect from July 1.
Amendment Made in FEMA Law
The Finance Ministry issued a notification on Tuesday regarding an amendment in the Foreign Exchange Management Act (FEMA) law. With the inclusion of LRS in this notification, any remittance of foreign currency exceeding Rs 2.5 lakh will now require approval from the Reserve Bank of India (RBI). Previously, international credit card payments for expenses incurred while traveling abroad were not eligible for LRS.
Section 7 Removed
In a recent notification issued by the Ministry of Finance, after consultation with the Reserve Bank of India (RBI), Section 7 of the Foreign Exchange Management Act (FEMA), 2000 has been removed. As a result, payments made abroad using international credit cards have now been included in the Liberalized Remittance Scheme (LRS).
Clarification Given By Ministry Provides
To address any confusion regarding this change, the Ministry has released a set of frequently asked questions along with their answers. It stated that while debit card payments were already covered under the LRS, expenses made abroad using credit cards were not previously included within this limit. This led to many individuals exceeding the LRS threshold.
Letter from RBI to the Government
Data received from companies facilitating overseas money transfers revealed that international credit cards were being issued with spending limits exceeding the current LRS limit of Rs 2.50 lakh. The ministry further mentioned that the RBI had raised concerns multiple times, advocating for equal treatment of foreign debit and credit payments.