Introduction

The recent Union Budget 2023 has introduced a significant update regarding the Tax Collected at Source (TCS) on outward foreign remittances. The new provision states that the TCS rate on all outward foreign remittances has been increased from 5% to 20%, except for educational and medical purposes. This article explores the impact of this update on foreign remittances, the reasons behind its implementation in the Indian economy, and how the TCS can be claimed and utilized for settling tax liabilities.

Reason Behind the Implementation of Higher TCS Rate 

The implementation of the increased TCS on outward foreign remittances serves multiple purposes within the Indian economy. Firstly, it aims to curb tax evasion by ensuring that a portion of the remitted funds is withheld as tax upfront. This measure enhances the government’s tax revenue and contributes to the overall development of the nation. Secondly, it aligns with the government’s focus on reducing the current account deficit by encouraging foreign exchange retention within the country. This move may also lead to the promotion of domestic investments and strengthen the Indian economy.

New rates with effect from 1st October 2023 

• For educational purposes, remittances in excess of Rs.7 lakh will attract a TCS of 5%.
• Remittances made for overseas education through an education loan paid abroad will attract a TCS of 0.5% beyond the threshold limit of Rs.7 lakh.
• Overseas Tour Package will attract a TCS  of  5% till Rs.7 lakh, 20% thereafter
• Any other foreign remittance such as travel, investment, asset acquisition etc., in excess of Rs.7 lakh will attract a TCS of 20%.

Maximizing TCS Benefits for Education Loans 

Parents need to submit certain documents to the bank for education loans to claim a lower TCS rate. These include:

• Education loan sanction letter with the student’s name and the parent who is the co-borrower.
• A declaration on the LRS application stating that the source of funds is from the loan.
• Bank statements showing the source of funds as an unused disbursed education loan by a financial institution.

Important Note:

To give adequate time to Banks and Card networks to put in place requisite IT-based solutions, the Government has decided to postpone the implementation of its 16th May 2023 e-gazette notification. This would mean that transactions through International Credit Cards while being overseas would not be counted as LRS and hence would not be subject to TCS. The Press Release dated 19th May 2023 stands superseded.

For international remittance, Indians should keep the following considerations in mind:

• Limit under LRS: The Liberalized Remittance Scheme (LRS) allows Indians to remit up to $250,000 per financial year for various purposes, including travel.

• Tax Collection at Source (TCS): The new provision states that the TCS rate on all outward foreign remittances has been increased from 5% to 20%, except for educational and medical purposes.

• Claiming tax credit: Individuals who have overseas transactions and pay TCS should remember to claim credit for the tax payment when filing their annual income tax returns in India. This enables them to offset the TCS against their total tax liability.

• Filing tax returns: Individuals can utilize the TCS amount for settling their tax liability while filing their returns. If they have an outstanding tax liability, the TCS can be used to offset that amount. On the other hand, if there is no tax liability or if the TCS amount exceeds the tax liability, individuals can claim the excess TCS amount as a refund. This ensures that the TCS collected is appropriately utilized and provides flexibility for taxpayers based on their specific tax situations. 

Conclusion

 As announced in the Union Budget 2023, the increased TCS rate on outward foreign remittances reflects the government’s commitment to enhancing tax compliance and bolstering the Indian economy. While it may initially impact the cash flows of individuals and businesses involved in international transactions, the provision allows for the claiming of TCS while filing the Income Tax Return (ITR) and utilizing it for settling tax liabilities. It is important to note that these changes will come into force from 1st Oct 2023 onwards. As a consultancy and advisory company operating in multiple countries, it is essential to adapt to the updated regulations, seek expert guidance, and optimize financial planning to ensure compliance and maintain smooth business operations in this evolving tax landscape.