Sending over 7 lakh abroad to face tax trauma

In a move that will block a big chunk of funds for those spending abroad, the

government

has announced a 5% tax collection at source (TCS) for remittances over Rs 7 lakh under the Liberalised Remittance Scheme.

The finance bill states that banks who receive Rs 7 lakh from an individual for remittance out of India under the LRS or from a seller of a tour package shall debit a sum equal to five percent of the remitted amount as income tax. In the 2016 budget, the government had put a similar 1% TCS for

purchase

of expensive cars. This TCS credit could be adjusted against the buyer’s income tax liability.

Indians have been sending on an average $1.5bn (Rs 10,700 crore) abroad every month under various heads including education, travel, purchase of immovable property, investment in equity/debt, gift/donations, maintenance of close relatives, and medical treatment. The LRS allows every individual to send up to $250000 abroad annually. The 5% TCS will enable the government collect $75 million in advance every month.

“So far there was no deduction of tax at source on remittances under the LRS. Now banks are required to collect tax at source on all remittances under LRS. If the remittance is to the senders own account, then they can claim credit for the tax. However, if it is paid to an overseas tour operator or an gift to a non-resident, the remitter will not get tax credit as the recipient would not be filing returns in India if they do not have any presence in India,” said Riaz Thingna Director, Grant Thornton Advisory

“Until now, tax collection at source provisions, which act as an additional tax on a transaction, are applied by the seller and recovered from the buyer in transactions such as purchase of alcohol, forest produce etc. These provisions are now widened to apply to LRS and the main reason is to create a tax trail for such remittances,” said

Gaurav Mehndiratta

, Partner - Corporate and

International Tax

, KPMG in India. He added that this would translate into additional compliance burden for the bankers and also result in working capital issues for the remitter till the time it is able to claim a credit of the same”

Unlike TDS which is deducted by the buyer, TCS is collected by a seller of specified goods from the buyer and the TCS is added to the sale amount and transferred to the government account.


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