Liberalised-Remittances Scheme

Meaning of the News Headline

The news headline "Liberalised Remittance Scheme" refers to the recent amendments made by the Indian Government, in consultation with the Reserve Bank of India, to the rules under the Foreign Exchange Management Act (FEMA). The key change is that spending on international credit cards outside of India is now included within the purview of the Liberalised Remittance Scheme (LRS).

Topic-

This news relates to the following topics in the UPSC Civil Services Examination syllabus:

1. General Studies Paper II: Governance, Constitution, Polity, Social Justice and International relations - Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

2. General Studies Paper III: Economic Development - Indian Economy and issues relating to planning, mobilization of resources, growth, development, and employment; Inclusive growth and issues arising from it; Government Budgeting; Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

3. General Studies Paper IV: Ethics, Integrity, and Aptitude - Ethical issues in international relations and funding.

4. Prelims: Economic and Social Development - Sustainable Development, Poverty, Inclusion, Demographics, Social Sector Initiatives, etc.

5. Optional Subject (Commerce and Accountancy, Economics): Aspects related to Indian and global taxation systems, monetary policy, and foreign exchange management.

Context: 

The Government in consultation with the Reserve Bank of India amended rules under the Foreign Exchange Management Act, bringing in international credit card spends outside India under the Liberalised Remittance Scheme (LRS).

About the News: 

• The use of an international credit card to make payments towards meeting expenses while overseas was so far not covered under the LRS.
• The spending by international credit cards will now attract a higher rate of Tax Collected at Source (TCS) at 20 per cent.
• Backdrop: 
• The move comes in the backdrop of a surge in spending in overseas travel under LRS, which zoomed 104 per cent between April-February in FY23. 
• The Finance Ministry said they have noticed that payments under the LRS were disproportionately high when compared to disclosed incomes, which indicated tax evasion and money laundering.

• Impact of the move: 
• The rules will help bring parity between the international usage of credit and debit cards, which were already part of LRS.
• This is expected to help track high-value overseas transactions and will not apply on the payments for purchase of foreign goods/services from India.
• The implementation of the TCS on credit card spends abroad could potentially increase the compliance burden for issuing banks.
• It can likely result in funds of individuals getting locked till the time actual refunds get initiated by the tax department.

Tax Collected at Source:

• TCS is a direct tax levy, which is collected by the seller of specified goods from the buyer and deposited to the government. 
• Taxpayers can then claim refunds on the TCS levy at the time of filing tax returns, which some experts pointed out could result in funds of individuals getting locked till the time actual refunds get initiated by the tax department.
• The government had already begun levying 5 per cent TCS on overseas remittances and for sale of overseas tour packages.

Liberalised Remittance Scheme:

• The Liberalised Remittance Scheme (LRS) is part of the Foreign Exchange Management Act (FEMA) 1999 which lays down the guidelines for outward remittance from India. 
• Under LRS, all resident individuals, including minors, are allowed to freely remit up to USD250,000 per financial year (April – March). 
• This can be for any permissible current or capital account transaction, or a combination of both.
• Permitted reasons for remittance under LRS:

·          

• Travel and tourism to foreign countries (except Nepal and Bhutan)
• Going abroad for employment
• Emigration
• Maintenance of close relatives living abroad
• Expenses in connection with medical treatment abroad
• Paying for education abroad
• Opening a foreign currency account abroad with a bank
• Purchase of property abroad
• Making foreign investments in equity shares, debt instruments, mutual funds, venture capital funds, etc.                                                                                                                                

Probable question

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)

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MCQs for practice:

1. Question: What could be a potential impact of the higher rate of Tax Collected at Source (TCS) at 20% on international credit card spends under the Liberalised Remittance Scheme (LRS)?

    Options:

    A. Decreased compliance burden for issuing banks

    B. Reduced overseas transactions

    C. Increased compliance burden for issuing banks

    D. No impact on overseas transactions

    Answer: C. Increased compliance burden for issuing banks

    Explanation: The implementation of TCS on credit card spends abroad could potentially increase the compliance burden for issuing banks as they would need to manage and monitor these transactions more carefully.

2. Question: Under the revised rules, will the Tax Collected at Source (TCS) apply on the payments for purchase of foreign goods/services from India?

    Options:

    A. Yes

    B. No

    Answer: B. No

    Explanation: The new rules will not apply the Tax Collected at Source (TCS) on the payments for purchase of foreign goods/services from India. The focus is on international credit card spends made outside India.

3. Question: What could be a potential drawback for taxpayers due to the application of Tax Collected at Source (TCS) on international credit card expenses?

    Options:

    A. They might have to pay additional transaction fees

    B. They could face difficulty in claiming TCS refunds

    C. They might lose the ability to use international credit cards

    D. They could face restrictions on the number of overseas transactions

    Answer: B. They could face difficulty in claiming TCS refunds

    Explanation: Taxpayers can claim refunds on the TCS levy at the time of filing tax returns. This process, however, might potentially lock up funds of individuals until the actual refunds get initiated by the tax department.

4. Question: Why might the government want to bring international credit card spends under the Liberalised Remittance Scheme (LRS)?

    Options:

    A. To encourage the use of international credit cards

    B. To track high-value overseas transactions and reduce tax evasion

    C. To reduce the cost of international transactions

    D. To discourage overseas travel

    Answer: B. To track high-value overseas transactions and reduce tax evasion

    Explanation: The change in rules is intended to help track high-value overseas transactions, reduce potential tax evasion and money laundering by bringing parity between the international usage of credit and debit cards.

5. Question: How does the Liberalised Remittance Scheme (LRS) influence the remittance activities of resident individuals?

    Options:

    A. It restricts all outward remittances

    B. It allows free remittance up to a certain limit per financial year

    C. It prohibits remittances for travel and tourism

    D. It imposes a high tax on all outward remittances

    Answer: B. It allows free remittance up to a certain limit per financial year

    Explanation: Under LRS, 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.