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The Indian government has implemented important changes regarding the usage of international credit cards (ICCs) for travellers going abroad. Previously, ICC transactions enjoyed unrestricted spending. However, a recent amendment has brought ICC transactions under the purview of the Liberalised Remittance Scheme (LRS). This article explores the implications of this amendment on individuals, taxation, the credit card industry, and various sectors related to foreign travel.
Introduction
The Indian government has recently implemented significant changes concerning the usage of international credit cards (ICCs) for individuals travelling abroad. Previously, travellers enjoyed an exemption that allowed unrestricted spending on ICCs to cover their expenses overseas. However, a recent amendment has brought ICC transactions under the Liberalised Remittance Scheme (LRS) purview introducing new limitations and requirements, which enable the higher levy of TCS, as announced in the Budget for 2022-23, from July 1. This article delves into the implications of this amendment on individuals, tax implications, implications on the credit card industry, and various sectors associated with foreign travel. Foreign Exchange Management Act (FEMA).
1. Shifting Landscape of International Credit Card Usage
Until the recent amendment, Indian travellers benefited from the ease and flexibility of using ICCs without restrictions while travelling abroad. The exemption provided a seamless experience, allowing individuals to utilize their credit cards for various purposes, including accommodation, dining, shopping, and other expenses.
However, the new regulations now bring ICC transactions within the ambit of Rule 5 of the Current Account Rules, 2000, signalling a significant shift in the landscape of international credit card usage.
2. Revisiting Rule 7 and its omission?
2.1. Provisions pre-omission
Earlier, Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 provides that:
“Nothing contained in rule 5 shall apply to the use of an International Credit Card for making payment by a person towards meeting expenses while such person is on a visit outside India.”
Whereas Rule 5, read with Schedule III of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, prescribes that Individuals can avail of foreign exchange facility for the specified purposes within the limit of USD 2,50,000 only. Any additional remittance in excess of the said limit for the following purposes shall require prior approval of the Reserve Bank of India.
Therefore, the usage of an international credit card to make payments towards meeting expenses during a trip abroad was not covered under the LRS (i.e. the 2,50,000 Limit). The spending through international credit cards was excluded from LRS by way of Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000.
2.2. Post-omission: Imposition of Limitations on International Credit Cards (ICCs) Spending
The Ministry of Finance vide notification G.S.R. 369(E) dated 16/05/2023 has omitted Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000. Now, the Govt. has taken away the exemption that was earlier available on usage of international credit cards (ICC) while travelling abroad.
Earlier, there was no upper limit up to which credit card could be used to cover expenses while being abroad as the restrictions under rule 5 were not applicable in case of the usage of ICC while being abroad.
3. Higher levy of Tax Collected at Source (TCS) on the ICC transactions
The Indian government, as part of its Budget for 2022-23, has introduced a significant change regarding the levy of Tax Collected at Source (TCS). The amendment aims to increase the rate of TCS for certain transactions and is scheduled to be implemented from July 1, 2023.
Therefore, as a result of the inclusion of ICC transactions under the purview of LRS, the higher TCS will be levied, as announced in the Budget 2022-23.
As part of the recent regulatory changes, a Tax Collected at Source (TCS) levy on credit card transactions abroad will be implemented in two phases. From the effective date until July 1, a TCS levy of 5 percent will apply to such transactions, excluding those in the medical and education-linked sectors. However, starting July 1, the TCS rate will increase to 20 percent.
This measure aims to enhance the monitoring and tracking of high-value overseas transactions made through credit cards. It is important to note that the increased TCS levy will not be applicable to payments for the purchase of foreign goods or services from India, ensuring that routine international trade remains unaffected.
4. Challenges for Banks Issuing ICCs?
The implementation of the 20% TCS on credit card spending abroad poses challenges for issuing banks. The increased compliance burden on banks will require them to ensure proper TCS deduction and remittance to the tax department. This could potentially result in the funds of individuals being locked until the actual refunds are initiated by the tax department, creating temporary financial inconveniences for cardholders.
5. Impact of the inclusion of ICC under LRS?
There would be the multifaced effect of this amendment; the first and foremost being the usage of ICC during foreign visits would now come under the transactions covered under LRS. This means now credit card transactions above USD 250,000 would require RBI’s approval.
Cap on forex spending upto would help in conserving the forex and would help in regulating the forex outflow by individuals and also curbing the activities which would result in money laundering.
This move would impact the high net worth individuals such as CEO, MDs, and Celebrities who are on frequent international assignments and who mostly use credit card to cover up expenses during foreign travel.
Conclusion
In conclusion, the recent amendment bringing credit card spending in forex under the LRS and imposing a higher TCS levy will have significant implications. It introduces stricter regulations, requires RBI approval for transactions exceeding USD 250,000, and aims to enhance financial monitoring. The cap on forex spending helps conserve reserves and regulate outflows.
The recent move to bring credit card spending in forex under the LRS and implement the TCS levy comes in response to a significant surge in spending on overseas travel under LRS. With a 104 per cent increase between April-February in FY23, this move aims to regulate and track high-value transactions.
The Other operational guidelines about credit card spending are expected to be issued later.
In the instant case, the financial creditor filed an application for initiation of the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor, which was admitted by the Adjudicating Authority (NCLT).
The Resolution Professional (RP) of the corporate debtor invited expressions of interest for the submission of resolution plans and received three resolution plans from prospective resolution applicants.
The Resolution Plan submitted by a consortium of 'H' (Respondent 1) and 'S' (Respondent 2), i.e., successful Resolution Applicants, was approved by the Committee of Creditors (CoC).
Consequently, the Unsuccessful resolution applicants contended that successful resolution applicants were disqualified under section 29A of the IBC. Thus, the resolution plan submitted by them could not be considered by the CoC for approval and the same needed to be rejected.
The unsuccessful resolution applicants contended that successful resolution applicants were disqualified under section 29A because 'R,' director of R2, was a suspended director of a company which was undergoing liquidation.
Further, unsuccessful resolution applicants submitted that the ineligibility of successful resolution applicants was because NM, managing director of Respondent 2, was also an ex-director of a company, which had been classified as a non-performing asset during the subsistence of his directorship.
The unsuccessful resolution applicants also submitted that 'V', whose name appeared in a wilful defaulters list and was a director of a company which was undergoing liquidation. He was also a director of R1 company. Thereby, R1 was ineligible under section 29A(b) of the IBC.
It was also submitted that successful resolution applicants were disqualified u/s 29A because its connected person 'VP' was the daughter of NM, i.e. managing director of R2, and she was married to the nephew of the erstwhile promoter of the corporate debtor.
The NCLT observed that since, 'R,' was an independent director in R2 company, he could not be treated as a connected person of R2 and, therefore, his ineligibility would have no bearing on the eligibility of the resolution applicant under section 29A, and R2 was not ineligible under section 29A of the IBC.
The NCLT, further observed that since NM was an independent director of said company and an independent director is a non-executive director and cannot be held responsible for leading the account of a company to NPA, due to the ex-directorship of NM in said company, R2 was not ineligible u/s 29A of the IBC.
The NCLT held that since 'V' resigned from R1 and, being an independent director, was not a connected person of R1, R1 was not ineligible under section 29A of the IBC.
The NCLT held that merely on the ground of 'VP' being in a distant relationship with the erstwhile promoter of the corporate debtor, successful resolution applicants could not be disqualified under section 29A of the IBC.
That’s it from us for today! Stay Tuned for more updates from?Taxmann.com.
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