
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)
To
know its answer , click here
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, you may submit your answer, click
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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.
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