[Opinion] A Chain of Amendments in TCS Provisions – Enhanced TCS Rates on Certain Overseas Remittances

CA Sudeep Das & CA Ashwath Pai – [2023] 152 taxmann.com 373 (Article)

The Reserve Bank of India (“RBI”) introduced the Liberalised Remittance Scheme (“LRS”) in 2004 to facilitate hassle-free foreign exchange remittances, wherein all resident individuals, including minors, are allowed to freely remit up to USD 250,000 per financial year for any permissible current or capital account transaction or a combination of both.

The Scheme was introduced on 04 February 2004, with a limit of USD 25,000. The LRS limit has been revised in stages consistent with prevailing macro and microeconomic conditions.

Tax Collection at Source (TCS) on remittances under the LRS was first introduced vide Finance Act, 2020, to widen tax net. Subsequently, the Finance Act 2023, revised the rates of TCS on LRS payments with effect from 01 July 2023.

Background of TCS provisions under the Income Tax Act, 1961 (“ITA”)

Section 206C(1G) of the ITA provides for TCS on:

• Foreign remittances through the LRS; and
• Sale of an overseas tour program package, and the corresponding rate at which taxes need to be collected.

As per the extant provisions, TCS at the rate of 5% shall be collected on foreign remittances under LRS exceeding INR 7 Lakh during the financial year. TCS at 0.50% has been prescribed to be collected if the foreign remittance is towards education abroad and if the money is remitted out of a loan obtained from any financial institution in India, as defined under Section 80E of the ITA.

As the LRS is applicable to resident individuals, non-residents cannot use this facility. Hence the provisions of Section 206C of the ITA are not applicable.

Further, the extant provisions apply to the seller of any tour package that offers a visit to a country or territory outside India. In such cases, TCS is applicable at 5% without any threshold limit.

TCS can be claimed as a tax credit while filing of tax return or determining advance tax liability.

Amendment to TCS provisions vide Finance Act 2023

Budget 2023, as a measure of “Widening & Deepening of Tax Base and Anti Avoidance”, proposed to increase the rate of Tax Collected at Source (TCS) on foreign remittances for purposes other than education and medical treatment from 5% to 20%, without any threshold limit, which was to take effect from 01 July 2023.

Amendments via Circular No. 10 of 2023 dated 30 June 2023

The Central Board of Direct Taxes (CBDT) has issued a circular to remove difficulty in implementation of changes relating to TCS, wherein, based on the comments received about the practical difficulties that may arise from the removal of the threshold for LRS payments (other than for education and medical treatment), the threshold limit of INR 7 lakhs was decided to be restored for foreign remittance for all purposes.

Further, the increase in TCS rates that was to come into effect from 01 July 2023 would now come into effect from 01 October 2023.

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