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All about TCS on Liberalized Remittance Scheme (LRS)
The Income Tax Department is tracking and keeping a trail of information from various sources. The source is widening with every passing year. One such new source of tracking is in respect of foreign remittances. Around $1.5bn (Rs 10,990 crore) on an average is remitted abroad every month by Indians for travel, education, medical treatment, investment in equity, debt/ immovable property, gift, donations, relatives, etc. The Liberalized Remittance Scheme (LRS) by RBI permits an individual to freely make overseas remittance of the fund. Indians who have someone abroad or going overseas for studies, vacation, medical treatment, etc utilizes this route to remit money within the prescribed limits
A new sub-section 206C(1G) is added in the Income Tax Act, 1961 to provide for collection of tax at source (TCS) in respect of all foreign remittances done under LRS. The section has been made effective from October 1st, 2020. With new provisions, emerge new issues & doubts. Let us know about the TCS on Foreign remittance under LRS.
1. LRS allows all resident individuals, including minors, to remit up to USD 250,000 per financial year (i.e., April – March) for any permissible current or capital account transaction or a combination of both without any limitations and restrictions. Few of the counts for which remittances can be done under LRS are;
a) Towards personal count like Education, Donation, Travel, Medical Expenses, Gift to Non-Resident Relatives, etc. for other personal purposes
b) Towards Capital nature payment like Bank Account opening/deposits, Immovable Property, Shares, Debt Instrument, etc.
2. LRS is available to residents individuals and so HUF/Firm/Company etc cannot take the shelter of LRS and so new provisions u/s 206C(1G) is not applicable to such categories of persons. Amount can be remitted on Minor’s behalf as well and in such cases the LRS declaration form is required to be countersigned by the natural guardian of the Minor.
3. For the definition of Resident, one has to refer Foreign Exchange Management Act (FEMA) and not the definition as per Income Tax Act. Section 2(v)(i) of FEMA, 1999 defines a resident individual as
(i) a person residing in India for more than 182 days during the course of the preceding financial year but does not include—
(A) a person who has gone out of India or who stays outside India, in either case—
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
(B) a person who has come to or stays in India, in either case, otherwise than—
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
4. All the foreign remittance is required to be done through an Authorized Dealer (AD) only. Such AD will be required to do the TCS compliance from the person who is remitting the fund out of India. Technically, the person who is remitting the fund outside India is referred to as the “buyer” in section 206C(1G). AD means a person authorized by the Reserve Bank of India under sub-section (1) of section 10 of the FEMA to deal in foreign exchange or foreign security.
5. The applicable TCS rate is @ 5% of the amount received from the buyer. However, if the PAN of the remitter is not available then the TCS shall be collected @ 10%. If the remittance is being made out from the loan obtained from any financial institution for the purpose of pursuing any education then the TCS shall be @ 0.50% & not 5%. It may be noted that if the remittance for pursuing education is out of own funds then the TCS rate shall be 5% and not 0.50%.
6. AD shall collect TCS from buyer at the time of debiting the buyer in his books of accounts or at the time of receipt of amount from buyer, whichever is earlier
7. It may be noted that the AD shall not collect TCS in the following cases:
a) If the buyer is liable to do TDS under any other provision of this Act and has done TDS such amount;
b) If the buyer is the Central Government, a State Government, an embassy, a High Commission, a legation, a commission, a consulate, the trade representation of a foreign State, a local authority etc.
8. The new sub-section (1G) of section 206C is introduced from the middle of the year i.e., from 1st October 2020. As far as the limit of Rs. 7 Lakh is concerned, the threshold of Rs. 7 Lakh shall be considered for the entire financial year. Therefore, for reckoning the limit of Rs. 7 Lakh, remittance done from 1st April 2020 to 30th September 2020 will also be considered.
9. No TCS shall be done on remittances by resident individuals to NRO accounts as a gift or a loan. This amount will not be reckoned for considering the threshold limit of Rs. 7 Lakh per Financial Year.
It may be noted that due to covid-19, concession of 25% is provided in the relief measures announced by the Government. As a result of this, the TCS rate u/s 206C(1G) shall be reduced by 25% i.e. rate at which TCS to be collected shall be 3.75% or 0.0375%, as the case may be, up to 31-03-2021
For ease of reference, section 206C (1G) is reproduced hereunder:
(1G) Every person,—
(a) being an authorised dealer, who receives an amount, for remittance out of India from a buyer, being a person remitting such amount out of India under the Liberalized Remittance Scheme of the Reserve Bank of India;
(b) being a seller of an overseas tour program package, who receives any amount from a buyer, being the person who purchases such package,
shall, at the time of debiting the amount payable by the buyer or at the time of receipt of such amount from the said buyer, by any mode, whichever is earlier, collect from the buyer, a sum equal to five per cent of such amount as income-tax:
Provided that the authorised dealer shall not collect the sum, if the amount or aggregate of the amounts being remitted by a buyer is less than seven lakh rupees in a financial year and is for a purpose other than purchase of overseas tour program package:
Provided further that the sum to be collected by an authorised dealer from the buyer shall be equal to five per cent of the amount or aggregate of the amounts in excess of seven lakh rupees remitted by the buyer in a financial year, where the amount being remitted is for a purpose other than purchase of overseas tour program package:
Provided also that the authorized dealer shall collect a sum equal to one half per cent of the amount or aggregate of the amounts in excess of seven lakh rupees remitted by the buyer in a financial year, if the amount being remitted out is a loan obtained from any financial institution as defined in section 80E, for the purpose of pursuing any education:
Provided also that the authorized dealer shall not collect the sum on an amount in respect of which the sum has been collected by the seller:
Provided also that the provisions of this sub-section shall not apply, if the buyer is,—
(i) liable to deduct tax at source under any other provision of this Act and has deducted such amount;
(ii) the Central Government, a State Government, an embassy, a High Commission, a legation, a commission, a consulate, the trade representation of a foreign State, a local authority as defined in the Explanation to clause (20) of section 10 or any other person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.
Explanation.—For the purposes of this sub-section,—
(i) “authorised dealer” means a person authorised by the Reserve Bank of India under sub-section (1) of section 10 of the Foreign Exchange Management Act, 1999 (42 of 1999) to deal in foreign exchange or foreign security;
(ii) “overseas tour programme package” means any tour package which offers a visit to a country or countries or territory or territories outside India and includes expenses for travel or hotel stay or boarding or lodging or any other expenditure of similar nature or in relation thereto.
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