Sending money abroad?

It’s imperative to understand the tax liability in outward remittances
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We are in an era of unprecedented tax reformation. We witnessed (and continue to witness) major taxation related reforms introduced in recent times. However, the mounting percentage of taxes, especially after the outbreak of Covid-19 pandemic, has baffled common people who continue to shell out more for less services and products.

Some two years back, it was the unprecedented increase in percentage of taxes on fuel which left fuel prices spiraling to a record level where petrol crossed Rs.100 per liter mark. The burden of taxes, especially on oil import, triggered high inflation as prices of essential and non-essential commodities skyrocketed.

Even the Reserve Bank of India (RBI) governor, Shaktikanta Das, put the blame on indirect taxes for increase in core inflation. Till date, inflation continues to remain a major concern and common people are facing the heat of rising prices of essential as well as non-essential commodities.

Actually, over a period of time, the burden of taxes has continuously been mounting in a sustained manner, breaking the spine of a common man. The government has even been blamed for levying double tax on a single service or a product through the continued tax reformative measures.

On this count, there are still many questions unanswered. This has left common citizens faced with imbalances on the income-expenditure front as they mutely witness a good percentage of their hard earned income being eaten up by a wide range of taxes.

Believe it or not, in the current regime of taxes, you are even made to pay almost 60% of tax on the cost of certain products. Even as hatred of taxes is deeply ingrained in the society, one thing is sure that you cannot escape tax net of any sort once your income crosses the threshold limits.

The scenario around tax reformation merits a focused attention of common citizens as they are left with no option but to plan their tax savings meticulously. Here, the role of tax consultants cannot be overlooked as tax planning is the most complex job and is not everybody’s cup of tea. And the most important thing to do even for a common man is to keep track of the mechanism of taxes. Otherwise ignorance can prove costly.

Let’s have a look at a major tax reform impacting international transactions. Among some big updates on the personal finance front in the Union Budget 2023, one big announcement was the change in TCS (Tax Collected at Source) for international transactions. 

The change in the tax structure (percentage of tax) is going to make sending of money abroad costly. Any one sending money abroad to a person, travelling abroad, buying assets (spending money on shopping) or investing abroad has to shelve out more tax on such transactions as the TCS is now hiked up to 20% from 5%.

The new TCS will come into effect from July 1, 2023 onwards. However, the remittances sent abroad for the purpose of education or medical treatment will continue to be charged at previous rates. Notably, the TCS limit for foreign remittances in India is currently set at 5% for all such remittances exceeding Rs.7 lakhs in a financial year.

This means that if an individual sends foreign remittances of Rs.7 lakhs or more in a financial year, the bank or authorized dealer would deduct 5% of the remittance amount as TCS before making the transfer.

What is the background of levying tax on sending money abroad?

The provision of the TCS was made effective from October 01, 2020. But the exemption limit was made applicable for the full financial year, i.e., 01 April 2020 till 31 March 2021. It started with 5% and is all set to increase to 20% from July, this year. However, there is no change in TCS rates for foreign remittances for education and medical purposes.

Meanwhile, there could be many reasons for the government to impose TCS on foreign remittances. Of course, it will increase the flow of revenue for the government. However, the move also seems to bring those into the tax net who have been evading tax liability by hiding their actual income.

Here, PC Mody, former Chairman of the Central Board of Direct Taxes (CBDT), is worth quoting as he said the TCS for remittances including education was introduced after some study was made and the government came across cases where the return profile of remitter did not match with the remitter made. “So it is just a question of cataloguing the remittances and matching returns,” he said.

Even the move will discourage people from traveling abroad and make them spend money within the country.

Of course, there may be many who have been transferring funds abroad and do not file income tax returns. People remitting large sums ideally should be in the income tax bracket and paying income tax. There are also some segments that apparently have no business to fall in the TCS trap and don’t file income tax returns, but they could be heading for a fancy tour at regular intervals with the whole family. The TCS has netted this segment and makes them pay if their remittance is in excess of specified limit.

However, it would have been in the fitness of things to exclude students from this tax net.

What is the volume of money sent abroad through the liberalized remittance scheme (LRS)?

Liberalized remittance scheme (LRS), which was introduced in 2004, allows all resident individuals, including minors, to freely remit up to $250,000 per financial year. This is for any permissible current or capital account transaction or a combination of both.

According to the Reserve Bank of India (RBI) data, aided by international travel, outward remittances under its liberalised remittance scheme (LRS) stood at $22.08 billion during the April–January period. In January 2023 alone, the amount remitted overseas totalled $2.72 billion.

This is the highest amount remitted under the scheme in a month during the current financial year. In FY22, Indians had remitted a little over $19.61 billion overseas under the LRS scheme, which is an all-time high.

What are the areas where Indians spend most while out of country?

According to RBI data, Indians spent mostly on overseas education and it is followed by maintenance of close relatives, and gifts. In January 2023, Indians sent outward remittances under the LRS scheme for overseas education to the tune of $395.87 million. It was followed by $342.47 million for maintenance of close relatives, and $223.22 million as gifts.

Is there any provision for claiming TCS refund?

Yes. According to an income tax expert, this TCS can be claimed as an income tax refund, or a credit can be availed when filing the income tax return or for computing your advance taxes. The bank provides a TCS certificate at the time of deduction, which can be used while claiming TCS in the Income Tax Return (ITR) filing.

As explained by the expert, if you want to remit Rs.1 lakh, for purposes other than education and medical, the TCS at the rate of 20% would be Rs. 20,000. Now, if your tax liability is Rs. 2 Lakhs, you can deduct the Rs. 20,000 from it to make it Rs. 1,80,000. This means, your net tax liability would be Rs. 1,80,000.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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