Modi govt’s new tax will mean more paperwork, costs for Indian students going abroad

Union Budget 2020 proposal to collect 5% tax on overseas remittances above Rs 7 lakh could increase short-term costs and paperwork for Indian students.

Representational image of Indian students abroad | Photo: Twitter | @nyuniversity

New Delhi: With the Narendra Modi government proposing to collect a 5 per cent tax at source for overseas remittances made under the liberalised remittance scheme (LRS), foreign education for Indian students could now require more short-term expenses and additional paperwork.

“It is proposed to provide for tax collection at source (TCS) on remittance under Liberalised Remittance Scheme of Reserve Bank of India exceeding seven lakh rupees in a year,” said Finance Minister Nirmala Sitharaman in her Union Budget speech on 1 February.

On account of this proposal, tax experts point out, students and their families will have to wait till the time of filing their income tax returns to claim the TCS paid, effectively blocking their cash for some time.

More than 7.5 lakh Indian students are estimated to be studying abroad. They use loans and savings from India to finance their education abroad, and the budget proposal is likely to adversely impact them, as well as new students queuing up to pursue their education overseas.

Under the LRS scheme of the Reserve Bank of India, Indian residents can send up to $250,000, or around Rs 1.8 crore, overseas every year for specified purposes like studying, medical treatment and emigration, among others. The government has put the onus on the banks to collect this TCS.

‘Not an additional tax’

An income tax department official clarified that the proposed TCS is not an additional tax, but like any other TDS/TCS. The credit of the TCS shall be allowed to the remitter against her tax liability in respect of her other taxable income, if any.

“If the remitter does not have any taxable income, the amount of TCS shall be refunded to her after she filed her income tax return,” the official said.

An email sent to the CBDT spokesperson Monday evening remained unanswered until the time of publication of this report.

The fine-print 

The budget proposes to amend Section 206C to levy TCS on overseas remittance and states that any authorised bank “receiving an amount or an aggregate of amounts of seven lakh rupees or more in a financial year for remittance out of India under the LRS of RBI, shall be liable to collect TCS” at a rate of 5 per cent.

In case of non-availability of PAN or Aadhaar, the rate is 10 per cent.

Riaz Thingna, director at Grant Thornton Advisory Services, said in case a transfer is made from an individual’s bank account in India to his bank account in a foreign country, then the individual will be able to able to claim credit for the TCS at the time of filing tax returns.

However, if a payment is made to a third party who has no business presence in India — for instance, a student paying fees to a foreign university — the credit cannot be availed and it will become a fixed cost for the student.

The students have an option to first transfer the money into their foreign bank account, and then make the payment to the university.

Thingna said it is possible for the tax department to bring in some exemptions while framing the rules, even if there is no mention in the budget documents.