What is Liberalised Remittance Scheme (LRS)?

What’s in today’s article?

• Why in news?
• What is Liberalised Remittance Scheme (LRS)?
• Background of LRS:
• Which transactions are allowed under the LRS?
• What are the Restrictions under LRS?
• What are the Recent Changes in LRS?
• News Summary: Banks readying systems to track spends on outward remittances
• What are the Challenges faced by Banks in new regime?
• Outward remittances under LRS

 

Why in news?

• Starting from July 1, the Reserve Bank of India plans to implement a 20% tax on the Liberalised Remittances Scheme (LRS). 
• As a result, banks are preparing their systems to monitor expenses made with international cards and collect the applicable tax on outward remittances.

 

What is Liberalised Remittance Scheme (LRS)?

• Liberalised Remittance Scheme (LRS) was brought out by the RBI in 2004.
• It allows resident individuals to remit a certain amount of money during a financial year to another country for investment and expenditure.
• According to the prevailing regulations, resident individuals may remit up to $250,000 per financial year.

 

Background of LRS:

• Resident Indians or people resident in India are allowed to transfer foreign currency under the foreign exchange regulations. 
  • The transfer of foreign currency outside India is governed by the Foreign Exchange Management Act, 1999 (FEMA).
• Hence, to regulate transferring of funds within a specified limit, RBI brought the LRS.

 

Which transactions are allowed under the LRS?

Image caption: Transactions  allowed under the LRS

• Apart from the areas highlighted in the above diagram, the remitted amount can also be invested in shares, debt instruments, and be used to buy immovable properties in overseas market. 
• Individuals can also open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the scheme.

 

What are the Restrictions under LRS?

• LRS restricts 
  • buying and selling of foreign exchange abroad, or purchase of lottery tickets or sweep stakes, proscribed magazines and so on, 
  • or any items that are restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.
• Also, one cannot make remittances directly or indirectly to countries identified by the Financial Action Task Force as non-co-operative countries and territories.

 

What are the Recent Changes in LRS?

• Announcement in Budget 2023-24
  • Budget 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.
• Changes made
  • May 2023, the Government amended rules under the FEMA to bring in international credit card spends outside India under the LRS.
  • As a consequence, spending on international credit cards would have then attracted a higher rate of TCS (tax collected at source) at 20 per cent from July 1. 
  • However, later, 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.
    • TCS is a direct tax levy, which is collected by the seller of specified goods from the buyer and deposited to the government. 
  • TCS can be adjusted against the overall tax liability. It can be claimed as an income tax refund or a person can avail of credit while filing the ITR or calculating the advance taxes.
  • It will not apply on the payments for purchase of foreign goods and services from India.

Image Caption: How LRS works under new regime

• Rationale behind new system
  • Indians are now increasingly using credit and debit cards abroad instead of taking travellers cheques or forex cards.
  • Until now, there is no estimate of money spent through cards abroad.
  • The new system will enable the government to track high-value overseas transactions.

 

News Summary

What are the Challenges faced by Banks in new regime?

• Banks are facing difficulties in evaluating and collecting TCS exemptions for credit and debit card transactions conducted outside India.
  • RBI has decided to leave it up to the banks to handle the collection of the tax imposed by the government in the FY23-24 budget.
• Deducting TCS is not a hassle. The hassle is to take into account certain exemptions into the system.
  • The exemption of up to Rs 7 lakh created some confusion.

 

Outward remittances under LRS

Image Caption: Outward Remittances under LRS

• There was an outflow of $ 27.14 billion (over Rs 2.22 lakh crore) under the LRS route in FY23.

 

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Q1) What is Tax Collected at Source (TCS)?

Tax Collected at Source (TCS) is a tax levied by the government of India on certain specified transactions. It is a mechanism for collecting tax at the source from the buyer or licensee, rather than from the income earner or seller. The person collecting TCS is required to collect a prescribed percentage of the transaction value as tax and deposit it with the government.

 

Q2) What is Foreign Exchange Management Act, 1999 (FEMA)?

The Foreign Exchange Management Act, 1999 (FEMA) is a legislation enacted by the Parliament of India to consolidate and amend the laws relating to foreign exchange transactions, external trade, and payments. FEMA replaced the previous foreign exchange law, the Foreign Exchange Regulation Act (FERA) of 1973.

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Source: Banks readying systems to track spends on outward remittances | Economic times | Business Today