Travelling to an overseas destination or remitting currency abroad to your kin will now carry an extra financial burden of 20 percent towards the tax credit from the next financial year, announced the Union Finance Minister Nirmala Sitharaman during the Budget 2023. These new rules will be applicable from July 1.
“The government seemingly wants to dissuade citizens from sending foreign currency abroad, and hence — levied a higher tax rate,” says Deepak Aggarwal, a Delhi-based chartered accountant.
It is, however, important to note that those who are remitting money abroad for education and for medical treatment will continue to pay 5 per cent for remittances in excess of 7 lakh under the Liberalised Remittance Scheme (LRS).
Also, the TCS rate on foreign remittances for education via loan from financial institutions will be 0.5 per cent in excess of 7 lakh.
For the unversed, LRS entitles Indian residents to freely remit up to $ 250,000 in one year without any permission from the Reserve Bank of India (RBI). Any remittance above this requires an explicit nod from the regulator.
What is the likely upshot?
On the face of it, a higher TCS on foreign remittance carries an additional cost, rendering the overall bill higher. But the tax experts believe that it is a tax credit, and not an additional liability, and hence is entitled to be refunded after the filing of income tax return.
“Flying abroad might lead to a higher outflow initially but hasn't got expensive per se. You can claim the credit of TCS paid while filing your taxes. Same is the case with investing abroad, say in US stocks. You'll have to pay additional 20% upfront but that is your tax credit, not expense,” said Chartered Accountant Kanan Bahl, growth consultant for fintech firms and AMCs.
Rahul Jain, a Pune-based chartered accountant from Rahul Jain & Associates, says it is likely to impact those who frequently travel abroad. But one should not overlook the fact that they will get this money back upon filing of their income tax returns.
“Citizens who don’t file their returns won’t get the refund of 20 percent TCS e.g., rich farmers or the ones who don't declare their income,” says Mr Jain.
Chirag Chauhan, a Mumbai-based chartered accountant from Chauhan & Co., says that it is not fair to say that the raising of this tax will have any impact on the number of people travelling abroad or spending money there.
“But it can definitely help track the people who use black money to travel abroad,” he says.
The idea behind the raising of tax is for the government to find out the source of foreign trips of citizens, particularly the ones who are not even filing their income tax (I-T) returns, Mr Chauhan says.
Needs a relook?
Some experts opine that this excessive tax credit is not only exorbitant but also leads to a large upfront cash outflow and hence needs a relook.
Mehul Bheda, Partner, Dhruva Advisors says “The increase of TCS on LRS remittances from 5 percent to 20 percent without any threshold - is a bit baffling and needs a relook. The idea of TCS was to track income and wealth that maybe escaping tax and was imposed on transactions that are not subject to TDS. However, that can be achieved by keeping the rate at a minimum.”
“This large TCS presumes that the remitter is not disclosing income and therefore needs to make a large tax deposit - which will be creditable/ refundable on filing return of income. This measure will discourage middle class travellers who may be looking forward to that once-in-a-lifetime overseas holiday that will now come with a large upfront cash outflow. All in all, this provision needs reconsideration,” says Mr Bheda.