1. The Finance Act 2020 has inserted Sub-section (1G) in section 206C of the Income Tax Act 1961 (Act) with effect from 1st October 2020.
2. Sub-section 1G as inserted is applicable to:
(a) Authorised dealers and,
(b) Overseas tour operators.
2.1 Sub-section 1G(a) is applicable to an authorised dealer, (which is usually a bank) as defined under section 10(1) of the Foreign Exchange Management Act 1999 (hereinafter “FEMA 1999”), who is liable to tax collection at source (hereinafter “TCS”) with effect from 1st October 2020 while remitting any amount under the LIBERALISED REMITTANCE SCHEME (hereinafter “LRS”) formulated by the Reserve Bank of India (hereinafter “the RBI”) under the provisions of FEMA 1999.
2.2 Sub-section 1G(b) is applicable to a seller of an overseas tour program package, arranged by him for any tour package which offers 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, who is liable to TCS with effect from 1st October 2020.
3. In this article, an attempt is made as to how to comply with the provisions related to TCS of sub-section 1G(a) of section 206C of the Income Tax Act 1961 (hereinafter “the I T Act”) in respect of remittance under LRS as stated in para 2.1 above.
4. Authorised dealer liable to collect tax at source
An “authorised dealer” means a person authorised by the RBI 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. [Explanation (i) below sub-section 1G]
Usually only a bank is allowed to deal in foreign currency for remittance abroad as per the provisions of FEMA 1999.
5. Remittance under LRS
The LRS is a liberalised scheme under FEMA 1999 allowing resident Individuals to remit funds abroad for permitted current or capital account transactions or combination of both within the overall ceiling limit of USD250,000 in a financial year.
5.1 The salient features of the LRS are as under:
5.1.1 Under the LRS, an authorised dealer (i.e. usually a banker, authorised to deal in foreign currencies by RBI), is authorised to remit foreign exchange up to US$2,50,000 per financial year (April-March) on the application made for remittance by resident individuals. Thus there is an upper ceiling limit of US$2,50,000 for remittance under LRS (subject to certain exceptions). This ceiling is effective from 26th May 2015.
5.1.2 The remittance equivalent to the above limits can be sent by the individual resident in a financial year.
5.1.3 Since the limit is fixed for a resident individual, each family member (even a minor member) of an individual’s family can remit foreign exchange to the above extent. Thus, if there are 5 members in a family, the total remittance to the extent of US$12,50,000 (at the rate of US$250,000 per member) can be remitted by the whole family.
5.1.4 Only the permitted current account and capital transactions as allowed under FEMA 1999 are allowed under LRS (discussed in detail in para 5.2 and 5.3 hereunder.)
5.1.5 Purchasing objects of art subject to the provisions of other applicable laws are allowed under the LRS as per the extant Foreign Trade Policy of the Government of India.
5.1.6 The remittance under the LRS can be used for outward remittance in the form of a DD either in the resident individual’s own name or in the name of beneficiary with whom he intends putting through the permissible transactions.
5.1.7 The resident individual can use this scheme for opening, maintaining and holding a bank account abroad in foreign currency, which can be used for transactions under this scheme
5.1.8 Investments made by the resident individual can be retained and income earned on such investments can be reinvested overseas. Thus, income generated from investment under this scheme is not required to be repatriated in India. However, direct overseas investments made in equity shares, convertible preference shares of a wholly owned subsidiary or a joint venture are required to comply with the overseas investments guidelines.
5.1.9 Resident individual is permitted to grant loan in Rupees to NRI/PIO a close relative (as defined under section 2(77) of the Companies Act 2013, by way of a loan subject to the following conditions:
(i) the loan given is interest free and for a minimum period of one year
(ii) the loan is within the overall ceiling limit of LRS of US$ 250,000
(iii) the loan is utilized by the borrower for his personal or business requirements
(iv) the loan is not utilized for prohibited activities such as
(a) the business of chit fund
(b) Nidhi company
(c) Agricultural or plantation activities or in real estate business, or construction of farm houses
(d) Trading in Transferable Development Rights (TDRs)
(v) the loan account is to be credited to the NRO account of the NRI/OCI
(vi) the loan amount shall not be remitted outside India
(vii) repayment of the loan should be made from outside India by way of inward remittance through banking channels by way of debit to his NRO or FCNRB account
5.1.10 The buyer of the foreign exchange is required to provide Permanent account no. while making the application for foreign remittance under LRS.
5.1.11 This scheme is not applicable to partnership firms, limited liability partnership firms, companies, Hindu Undivided Families, Trusts etc.
5.1.12 A resident cannot gift or donate to a non-resident for depositing the money in the resident’s account abroad under this scheme.
5.1.13 Banks are not allowed to extend any kind of credit facilities to resident individuals to facilitate capital account remittances under the Scheme.
Remittances for any purpose specifically prohibited under Schedule I or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transaction) Rules, 2000, dated May 3, 2000, as amended from time to time are not allowed under this scheme.
5.1.14 Transactions under this scheme for capital account remittances to countries identified by Financial Action Task Force (FATF) as non-co-operative countries and territories as available on FATF website www.fatf-gafi.org or as notified by the Reserve Bank are not allowed.
5.1.15 No remittances, directly or indirectly, can be made to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.
5.1.16 All other transactions which are otherwise not permissible under FEMA and those in the nature of remittance for margins or margin calls to overseas exchanges/ overseas counterparty are not allowed under the Scheme
An application for remittance under LRS is required to be made in the prescribed Form no. A2 (Please refer RBI web site for the format, the form is 5.1.17 available with the authorised dealer, the remitter bank also)
5.2 Permitted current account transactions under LRS
5.2.1 The list of permitted current account transactions under the LRS for which the remittance is allowed are as under on which the authorised dealer is required to collect tax at source at the rate of 5% if the remittance or the aggregate remittance exceeds Rs 7 lakhs in a financial year [Proviso two to sub-section 1G of section 206C]:
|List of current account transaction on which TCS @ 5% (also see the exception below the table) is to be collected by an authorised dealer:|
|(i) private visits abroad (other than Nepal and Bhutan) including expenses related to travel|
|(ii) gift to any person or donation to any organization;|
|(iii) going abroad on employment;|
|(iv) emigration abroad to the extent of amount prescribed by the country of origin or US$250,000. Remittance of any amount of foreign exchange outside India in excess of this limit may be allowed only towards meeting incidental expenses in the country of immigration.
However, remittance is not allowed for earning points or credits to become eligible for immigration by way of overseas investments:
(a) in government bonds
(c) commercial enterprise; etc.
|(v) maintenance of close relatives abroad:|
|(vi) business trips abroad;|
|(vii) *medical treatment abroad|
|(viii) **studies abroad
Remittance in excess of US$250,000 is allowed based on the intimation by the foreign institute in case of studies abroad.
*in case of medical treatment abroad, a person is also allowed to remit additional US$250,000 to the limit of LRS of US$250,000 for accompanying as attendant to a patient going abroad for medical treatment/check-up.
**in case of remittance of loan amount not exceeding Rs 7 lakhs which is eligible for deduction under section 80E of the I T Act is remitted abroad, then the rate of TCS will be 0.5% instead of 5%[Proviso three to sub-section 1G of section 206C]
5.2.2 Release of foreign exchange exceeding USD 2,50,000 requires prior permission from the Reserve Bank of India and will be liable to the applicable rate of TCS. However, this is not applicable for fees paid for studies abroad based on the intimation from the overseas institute.
5.2.3 No TCS to be collected if the remittance is less than Rs. 7 lakhs in a financial year, [Proviso one to sub-section 1G of section 206C]
5.3 Permitted capital account transactions under LRS
5.3.1 The list of permitted current account transactions under the LRS for which the remittance is allowed are as under on which the authorised dealer is required to collect tax at source at the rate of 5% if the remittance or the aggregate remittance exceeds Rs 7 lakhs in a financial year:
[Proviso two to sub-section 1G of section 206C]
|(i) Opening a foreign currency bank account|
|(ii) Purchase of a property abroad|
|(iii) Making investments abroad such as:|
(a) acquisition and holding shares of both listed and unlisted overseas company;
(b) acquisition and holding debt instruments of both listed and unlisted overseas company;
(c) acquisition of qualification shares of an overseas company for holding the post of Director
(d) acquisition of shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration
(e) investment in units of Mutual Funds,
(f) investment in units Venture Capital Funds,
(g) investments in unrated debt securities, promissory notes
(h) setting up Wholly Owned Subsidiaries and Joint Ventures outside India for bonafide business subject to certain terms & conditions stipulated
(i) giving loans (including loans in Indian Rupees) to Non-resident Indians (NRIs) who are relatives as defined in Companies Act, 2013.
5.3.2 No TCS to be collected if the remittance is less than Rs. 7 lakhs in a financial year, [Proviso one to sub-section 1G of section 206C]
5.4 List of relatives whom loan can be granted under LRS
5.4.1 The list of relatives, who are eligible to receive a loan under LRS from a resident individual are defined under section 2(77) of the Companies Act 2013 as enumerated below.
5.4.2 As per the said section, a “relative” with reference to any person, means any one who is related to another, if—
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed;
|Prescribed list of relatives in terms of Clause (77) of section 2 (refer item no (iii) above of para 5.4.2):|
|A person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:-|
(a) Father (including step father, if any)
(b) Mother (including step mother, if any)
(c) Son (including step son if any)
(d) Son’s wife.
(e) Daughter (Note: Step daughter not a relative).
(f) Daughter’s husband
(g) Brother (including step brother, if any)
(h) Sister (including step sister, if any)
5.4.3 The TCS @ 5% is to be collected by an authorised dealer for any loan or aggregate loan in a financial year given by a relative as listed above under this scheme, if the loan amount exceeds Rs 7 lakhs in a financial year. [Proviso two to sub-section 1G of section 206C]
5.4.4 No TCS to be collected if the remittance is less than Rs. 7 lakhs in a financial year, [Proviso one to sub-section 1G of section 206C]
6. No TCS on the sum collected by authorised dealer
As per the proviso four to the sub-section 1G of section 206C, the authorised dealer is not required to collect tax on any sum collected by him towards the remittance made by him for the buyer.
7. No TCS for foreign remittance made by the authorised dealer if the buyer is:
[Proviso five to sub-section 1G of section 206C]
7.1 liable to deduct tax at source under any other provision of this Act and has deducted such amount;
7.2 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 10or 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.
8. As can be observed from the above discussion, the authorised dealer banks must have a check list prepared based on the foreign exchange transactions, which are:
8.1 allowable to be remitted under the LRS :
8.1.1 without collection of tax;
8.1.2 collection of tax at the normal rate of tax @5%
8.1.3 collection of tax at the concessional rate of tax 0.5%
8.2 not allowed under the LRS