An Overview of the Liberalised Remittance Scheme (LRS)
- The Liberalised Remittance Scheme (LRS) allows an individual to send up to $250,000 to a foreign jurisdiction each year.
- Indian residents, as defined by the Foreign Exchange Management Act (FEMA), are eligible to avail of the LRS.
- Entities such as corporations, partnership firms, Hindu Undivided Families (HUF), trusts, and others cannot use the LRS.
Learn more about the intricacies of the Liberalised Remittance Scheme [LRS].
Why is the Liberalised Remittance Scheme (LRS) Needed?
- The $250,000 limit may be insufficient for a resident who wishes to buy property abroad, undergo a medical procedure, or pursue education.
- Therefore, many high-net-worth individuals (HNIs) have been accumulating foreign exchange by sending up to $250,000 annually to meet these expenses.
- The Liberalized Remittance Scheme(LRS) serves as a regulated channel for Indian citizens to send money abroad.
Image Source: Economic Times
Potential Challenges Associated with the Liberalised Remittance Scheme (LRS)
- The LRS process may expose residents to increased risks.
- Previously, the unused money would typically be stored in bank accounts, which carry a minimal risk of capital loss. However, it is now being invested in securities, which carry a risk of loss.
- While this requirement helps residents avoid keeping unused funds abroad, it also exposes them to some risk, depending on the type of investment.
- Remittances from abroad could put additional pressure on the country’s foreign exchange reserves.
Recent Developments in the Liberalised Remittance Scheme
The Centre has revised the rules under FEMA to include international credit card spends outside India under the LRS.
- Resident individuals, including minors, are allowed to send up to US $2,50,000 (approximately Rs 2.06 crore) overseas per year through the Liberalised Remittance Scheme (LRS) without needing prior approval from the RBI.
Background and Key Changes
- Earlier, credit card transactions were exempted from LRS by Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000. However, with the new notification, Rule 7 has been removed.
New Amendments
- The recent amendments made by the Centre under FEMA now bring international credit card expenses outside India under the purview of the Liberalised Remittance Scheme (LRS).
- From July 1, there will be a higher rate of Tax Collected at Source (TCS) at 20% for international credit card expenditures. Until June 30, a TCS rate of 5% applies to overseas tour packages or any other category, excluding medical and education expenses.
- It’s important to note that these changes do not affect payments made for purchasing foreign goods or services from India.
Rationale Behind the New Amendments
- The amendments aim to promote fairness, transparency, and effective management of foreign exchange transactions while preventing misuse and ensuring compliance with disclosure requirements.
- The amendment was made to bring parity between the international usage of credit and debit cards. Debit cards were already included in the Liberalised Remittance Scheme (LRS), which allows individuals to remit a certain amount abroad without prior approval. By including credit card spends under LRS, the rules aim to create a consistent framework for both types of cards.
- Instances were noticed where LRS payments were significantly higher than the disclosed incomes of individuals. This suggests potential discrepancies and raises concerns about tax evasion or undisclosed sources of income. The rule tweak aims to address this issue by capturing and regulating the total expenditures under LRS more effectively.
- LRS does not cover business visits of employees when the expenses are borne by the employer. This exclusion helps distinguish between personal expenditures and business-related transactions, ensuring that the LRS limits are used for individual purposes rather than for corporate expenses.
Impact of the Amendments
- The changes may impose a significant compliance burden on card-issuing banks and consumers.
- The TCS rate of 20% for international credit card spending may be perceived as high, leading to potential challenges and financial burdens.
- Determining whether an employee’s overseas travel expenses are business-related or not may pose practical challenges.
- Refunds for TCS levy can be claimed during tax return filing but may result in funds being locked until the refund is initiated.
What is Tax Collected at Source (TCS)?
- Tax Collected at Source (TCS) is an income tax that the seller of specific items must collect from the customer.
- Under the TCS concept, a person selling a certain item is required to collect tax from a customer at a set rate and deposit the money with the government.
Conclusion
The Liberalized Remittance Scheme (LRS) of the Reserve Bank of India (RBI) allows residents to send a predetermined sum of money to another country for investment and expenditure within a fiscal year. The investment is significant because Indians’ remittances under the Liberalized Remittance Scheme (LRS) have surged over the past few years due to booming stock markets and other attractive investment opportunities.
Related Links | |||
Difference between FERA and FEMA | Foreign Exchange Management Act (FEMA) | ||
Forex Reserves | Foreign Direct Investment (FDI) | ||
Indian Economy Notes For UPSC | UPSC 2023 Calendar |