India hits brakes on remittance tax hike amid clamor for rollback

Banks, tax consultants, and travel agents have welcomed the government’s move this week to extend the timeline to levy the higher proposed tax collected at source (TCS) under the liberalized remittances scheme (LRS) to 1 October instead of 1 July, but are seeking a complete rollback.

The LRS was introduced by the Reserve Bank of India (RBI) to allow individuals, including minors, to freely remit up to $250,000 abroad every financial year for purposes such as travel, education, and investments without seeking its approval.

The government, in this year’s annual budget in February, raised TCS on all foreign remittances via LRS to 20% from 5%, except for education and medical treatment. The rates were to come into effect from 1 July.

Inadequate infrastructure

Lenders had raised concerns with RBI and the finance ministry that their information technology (IT) infrastructure was not ready yet to implement the scheme and that it was difficult to track overseas credit card spends and other remittances on a real-time basis.

Tax experts said the government won’t earn any revenue from the tax, as it can be adjusted by the taxpayer against their overall tax liability. Taxpayers can either claim it as a refund or avail of credit while filing returns or calculating advance taxes.

Travel agents, meanwhile, have welcomed the government’s action but have demanded scrapping the move to impose 20% TCS as it is a stumbling block to boosting outbound tourism.

Finance ministry notification

The finance ministry, in a notification issued on 28 June, said foreign remittances up to ₹7 lakh ($8,534) per individual per financial year will not attract TCS. The notification said, “Threshold of ₹7 lakh per financial year per individual…shall be restored for TCS on all categories of LRS payments through all modes of payment regardless of the purpose. Thus, for the first ₹7 lakh remittance under LRS, there shall be no TCS.”

However, for remittance beyond ₹7 lakh, the finance ministry has decided to levy different rates as per the nature of the transaction. The ministry declared that it will charge 5% TCS on overseas tour packages for amounts up to ₹7 lakh and 20% beyond this limit. TCS on tour packages used to be 5% earlier without any threshold.

Subhash Goyal, chairman of the STIC Travel Group and the aviation and tourism committee of the Indian Chamber of Commerce, argued: “Deferment of the tax is no solution, but it should be scrapped.”

Referring to India’s G20 theme of ‘Vasudhaiva Kutumbakam’, which means ‘One Earth, One Family’, Goyal said that on the one hand India is projecting the entire world as one family, and on the other hand, the government is restricting people from traveling from one country to another by imposing a 20% tax.

Outbound tourism is yet to return to pre-Covid levels, Goyal said, adding that about 18 million tourists traveled abroad last year against 21 million in 2019.

Education fees

The government decision also has implications for students pursuing education abroad. The US issued 1,25,000 F1/F2, or student, visas in 2022. Education loans exceeding ₹7 lakh will attract 0.5% of TCS. The remittances not funded by an education loan but for education will attract 5% if the amount exceeds ₹7 lakh.

Dilip Oak, an overseas education consultant from Pune, said it’s a temporary relief to parents till 1 October but said the tax is a big burden on parents who are sending their children for education abroad.

Tax consultant Mahesh Baghwat said there has been a significant hike in educational fees and medical treatments abroad post-covid.

“Post-covid, educational fees in foreign institutions have gone up by up to three times. Similar is the case with medical treatment. In such a scenario, the government should have considered raising the exemption limit up to ₹10 lakh,” Baghwat said.

Overseas travel

Ravi Gosain, vice-president of the Indian Association of Tour Operators, said the 20% TCS on remittances beyond ₹7 lakh should be scrapped and highlighted the need for uniformity in the mode of remittance.

“The government is not levying TCS on credit card spends, but will apply TCS of 5% on a cap of ₹7lakh and 20% for payments done by travel agents of tour operators beyond ₹7 lakh. So we are demanding the removal of disparity,” Gosain said.

To be sure, on 16 May, the government had brought overseas credit card spending under LRS, which meant any spending abroad using credit cards would attract a 20% tax from 1 July. Soon after, the government clarified that no TCS will be charged on spendings of up to ₹7 lakh abroad using any debit or credit card.

Jyoti Mayal, president of the Travel Agents Association of India, said the latest government move comes as a partial relief, but will help Indian travel agents retain competitiveness against global players.