Question- Critically analyse the impact of recent amendments to the Liberalised Remittance Scheme on foreign transactions. Discuss the implications on tax evasion, money laundering and compliance burden for issuing banks in India.
(15 Marks) 

Introduction

The Liberalised Remittance Scheme (LRS), introduced by the Reserve Bank of India, allows resident individuals to remit a certain amount of money during a financial year to another country for investment and expenditure. The recent amendments to the LRS bring international credit card spends outside India under this scheme and impose a higher rate of Tax Collected at Source (TCS). The amendments aim to curb tax evasion and money laundering while bringing parity between the international usage of credit and debit cards.

Demand of the Question - Impact Analysis

1.     Curbing Tax Evasion and Money Laundering: By bringing international credit card spends under the LRS, the amendment aids in tracing high-value transactions, thereby potentially reducing tax evasion and money laundering. As more transactions come under scrutiny, the space for unaccounted foreign transactions shrinks, fortifying the system against illicit fund flows.

2.     Increased Compliance Burden: While the amendment adds a layer of transparency, it also increases the compliance burden for banks. Banks are now tasked with the additional responsibility of collecting and depositing the tax, and maintaining records of such transactions. The implementation of TCS on credit card spends abroad may increase operational complexities and costs for banks.

3.     Parity Between International Usage of Credit and Debit Cards: Previously, international debit card transactions were under the purview of the LRS, but credit card transactions were not. The amendment brings in parity, making the policy uniform for both types of cards, thereby avoiding any potential misuse of the differential treatment.

Way Forward

To maximize the benefits and minimize the challenges posed by the amendment, certain steps can be taken:

1.     Ease Compliance: Regulators can provide clear and detailed guidelines to banks about the processes involved in the implementation of the new rules, easing their compliance burden. Automation of processes may help in reducing operational complexities and errors.

2.     Awareness Among Users: Widespread awareness should be spread among credit card users regarding the new rules and their implications, so that they can plan their international spends accordingly.

3.     Robust Monitoring System: A strong and efficient monitoring and reporting system needs to be put in place to track transactions and identify any anomalies. This will aid in achieving the objective of curbing tax evasion and money laundering.

In conclusion, the amendment to the LRS is a progressive move that can enhance transparency and accountability in foreign transactions. With adequate support to banks and informed users, the challenges can be effectively managed.