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No, Netflix won’t be more expensive because of Modi govt’s new foreign transaction rules. Here’s why

Breaking down the new tax rules for payments made abroad, including those using credit cards. Compliance costs are set to increase.

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New Delhi: In light of significant pushback on social media and by businesspeople, the Union Ministry of Finance Thursday issued a detailed document addressing several questions regarding changes it has made to rules governing monetary transactions made abroad.

The issue flared up following a gazette notification by the ministry Tuesday which included international credit card transactions in the purview of the foreign exchange management rules put in place by the government.

According to the notification, credit card transactions made abroad will now attract a 20 per cent Tax Collected at Source (TCS). The new rules will come into effect from 1 July.

In other words, if Indians make payments abroad using any mode of payment, including their credit cards, above Rs 7 lakh per financial year, they will have to pay 20 per cent extra as TCS. However, this 20 per cent will either be adjusted against the tax they have to pay at the end of the year, or will be refunded in case it exceeds the tax payable.

The notification sparked a wide range of fears, including people saying their Netflix subscriptions would become more expensive, the compliance burden would increase, the refunds won’t come on time, and that employees sent abroad for work would end up having to pay more.

Notably, the criticism of the decision came from across the spectrum, with many taking to Twitter to voice their concerns.

For example, former Infosys chief financial officer (CFO) T.V. Mohandas Pai asked “why is @FinMinIndia bent on harassing all taxpayers and citizens”, adding that TCS at 20 per cent would cause pain to all citizens. He appealed to Union Finance Minister Nirmala Sitharaman and Prime Minister Narendra Modi to intervene.

Journalist Abhijit Iyer-Mitra pointed out that the government’s plan amounts to an extra-territorial tax, which would mean other governments would have to “sit back & watch” a foreign government levying taxes on goods and services in their country.

Meanwhile, Congress MP Manish Tewari said that “just as TDS coupled with a 30 per cent tax on crypto assets compelled the crypto ecosystem to migrate to more tax-friendly geographies, similarly this 20 per cent TCS on international credit card spends will  incentivise adoption of less formal/alternative means for foreign spends”.

The government has addressed some of these concerns in its clarificatory document, which ThePrint has broken down for ease of understanding.


Also Read: The chances of India being named a currency manipulator are slim


What was the earlier system?

The inclusion of credit cards is only the latest in a set of steps the government has taken to keep track of, and possibly disincetivise, international payments.

The regulation of foreign exchange transactions was brought in under the Foreign Exchange Management Act, 1999, (FEMA), which came into effect from 1 June, 2000.

Under the Act, there is a Liberalised Remittance Scheme (LRS), which came into effect in February 2004, which, according to the Reserve Bank of India (RBI), was designed to serve as a “liberalisation measure to facilitate resident individuals to remit funds abroad” for permitted transactions.

Graphic: Ramandeep Kaur | ThePrint
Graphic: Ramandeep Kaur | ThePrint

Under the LRS, a cap was imposed on how much money an individual could spend abroad, before having to approach the RBI for permission. This limit started off at $25,000 and was subsequently periodically revised, sometimes upwards and sometimes downwards, until it reached $2,50,000 in May 2015. It has not been changed since.

What has been changed?

A TCS or a Tax Deducted at Source (TDS) is usually imposed by the government in order to keep track of transactions. One example of this is the 1 per cent TDS imposed on cryptocurrency transactions, which the government imposed in Budget 2021-2022.

The earlier LRS rules said that for medical and educational expenditure, no TCS would be applied if the amount spent was less than Rs 7 lakh. On expenditure of more than Rs 7 lakh for these two purposes, a TCS of 0.5 per cent was being levied if the expenditure was through a loan from a financial institution and 5 per cent if it was not. These rules have not been changed.

Most other remittances made, whether in stocks, bonds, gifts, or real estate, were earlier treated under the same rules as medical or education expenditure. That is, expenditure above Rs 7 lakh attracted a 5 per cent TCS.

However, in Budget 2023-2024, presented on 1 February this year, Sitharaman introduced a few changes to other transactions.

“For foreign remittances for other purposes under LRS and purchase of overseas tour programme, it is proposed to increase the rates of TCS from 5 per cent to 20 per cent,” the budget speech document said.

However, the government further updated this on Friday. Now, only transactions that exceed Rs 7 lakh per financial year will attract a 20 per cent TCS.

These rules, too, will come into effect on 1 July.

What is the latest?

In a follow-up to the budget announcement, the finance ministry Tuesday notified the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023. The long title accompanied a very short notification.

“In the Foreign Exchange Management (Current Account Transactions) Rules, 2000, rule 7 shall be omitted,” the notification said.

Rule 7 exempted from the LRS rules the international credit card transactions made by a person to meet their expenses while abroad. That is, if Indians used their credit cards to make payments abroad, they could do this in excess of the $2,50,000 limit imposed for transactions by other means (debit cards, cheques, etc.)

The omission of this rule means that international credit card transactions will be subject to the same limits. That is, all your international transactions together cannot exceed $2,50,000 and they will attract a 20 per cent TCS.

Does this apply to all transactions made to a foreign company?

Following Tuesday’s notification, several users took to social media to ask whether this 20 per cent TCS would apply on credit card payments made for subscriptions like Netflix, or to foreign ride-hailing apps like Uber.

The short answer is no, the TCS will not apply to them since these payments are made in rupees and not in a foreign currency.

Another fear among social media users was that credit card payments for subscriptions of foreign publications would attract TCS. Here, too, the factual position is that only credit card payments made while the person is abroad will attract TCS. Further, they will attract TCS only if the transactions exceed Rs 7 lakh per financial year.

According to the rules, the TCS — at the varying rates specified above — will apply on the following transactions: private visits to any country (except Nepal and Bhutan), gifts or donations made abroad, expenses incurred while going abroad for employment or emigration, money spent in foreign currency for the maintenance of close relatives abroad, travel for business, or attending a conference or specialised training or for meeting medical expenses, or a check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment or check-up, studies abroad, and any other current account transaction.

In its FAQ document issued Thursday, the finance ministry clarified that a current account transaction involves the following: payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business, payments due as interest on loans and as net income from investments, remittances for living expenses of parents, spouse and children residing abroad, and expenses in connection with foreign travel, education and medical care of parents, spouse and children.

Why has TCS rate been increased to 20 per cent?

The government’s rationale for increasing the TCS rate to 20 per cent is that this rate is applicable mostly to high net-worth individuals and that the 20 per cent amount would be refunded at the end of the year, in any case.

Further, it states that the 20 per cent amount could be reduced from the advance tax paid, thereby leading to no change in their money in hand.

“If the TCS payee is a taxpayer, he can claim credit for the TCS as his tax payment against regular income and adjust it against the advance tax, etc., payments accordingly,” the FAQ document says.

“If the TCS is of a person not being a taxpayer, then the 20 per cent rate on such presumed income is not high,” it adds. “The tax rate slab of 20 per cent starts in the new regime for incomes over Rs 12 lakh and is 30 per cent for incomes over Rs 15 lakh.”

According to the government, it has noticed several instances where LRS payments are “disproportionately high when compared to the disclosed incomes”. That is, the government has found people spending amounts abroad far in excess of what their disclosed income should have enabled.

However, several bankers ThePrint spoke to said that this still did not make sense, since the transactions can be tracked in any case because they are made in digital form. Further, they said, even a 0.5 per cent TCS would have enabled the tracking of these payments.

“The reason for increasing the rate to 20 per cent is simply to disincentivise spending abroad,” Girish Vanvari, founder of Taxation Square and former tax head for KPMG, told ThePrint. “The government wants people to spend in India.”

Graphic: Ramandeep Kaur | ThePrint

An analysis of RBI data from 2008 to 2023 by ThePrint has found that international transactions under LRS have indeed ballooned in the past few years.

In the financial year ending March 2023, Indians sent a total of $27.14 billion in outward remittances under the LRS, a 38.4 per cent jump from the previous year’s $19.6 billion.

On average, the remittances spent abroad have risen by about 19 per cent each year since 2017-18 (compounded annually).

And this increase is not being driven by an increase in educational or medical expenditure — it’s the money spent on “travels” that has really grown.

The travel section includes both private visits to any country (except Nepal and Bhutan) and business visits, and is currently the biggest reason for spending abroad.

Graphic: Ramandeep Kaur | ThePrint

“The thinking behind this is also about Atmanirbhar Bharat,” a senior official in the finance ministry explained to ThePrint. “A lot of this expenditure abroad is in the form of assets and travel, and those are being brought under the higher TCS.”

Why has government included credit cards?

“While on a visit abroad, a person could use international debit cards or other methods or international credit cards for undertaking current account transactions,” the government’s FAQ document states. “Due to the exemption under erstwhile Rule 7, expenditures through credit cards were not accounted for under the specified LRS limit, which has led to some individuals exceeding the LRS limits.”

The finance ministry further stated that data it had collected from the top money remitters under LRS showed that in many cases, international credit cards were being issued with limits in excess of the LRS limit of $250,000.

“What was happening is that high net-worth individuals were using their credit cards to exceed the LRS limit and were spending large sums abroad,” a senior official from the RBI told ThePrint. “The government wanted to put a stop to this.”

The FAQ document of the government says as much.

“The differential treatment between debit cards and credit cards needed to be removed in the interest of uniformity and equity in the treatment of modes of drawal of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits,” the document says.

The government added that the RBI had written to it on “more than one occasion” highlighting the need to remove the differential treatment given to international credit card transactions.

What concerns remain?

Several concerns do remain, even after the government’s clarification.

One question is whether a debit card transaction made to subscribe to a foreign publication, where the payment is made in a foreign currency, would attract TCS. Tax experts don’t yet have an answer.

Another question is how this mechanism would work. Bankers say the RBI will issue a set of rules soon that will clarify who will collect the TCS, whether it is the banks, or the merchants abroad.

Another contention to the new rules is that, if the idea is to reduce the amount Indians are spending abroad, why not simply reduce the LRS limit. Transactions can be tracked at even a minuscule rate of TCS.

Finally, businessmen ThePrint spoke to said the main fear is that large amounts of their money will be locked up as TCS and that the refunds from the government will not come on time.

ThePrint reached the Finance Ministry over phone for comment. The article will be updated once a comment is received.

This report has been updated to reflect further clarifications issued by the Ministry of Finance Friday evening.

(Edited by Nida Fatima Siddiqui)


Also Read: Here’s how India’s middle class forces a Right-wing Modi govt to stay economically Left


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