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September 15, 2020

Remitting money to outside India? Know TCS implication from 1st October 2020

by CA Shivam Jaiswal in Income Tax, RBI

Remitting money to outside India? Know TCS implication from 1st October 2020

Foreign remittance is a transfer of money from a foreign worker to their family or other individuals in their home countries. In many countries, remittance constitutes a significant portion of a nation’s economic growth as measured by gross domestic product (GDP). The term inward remittance can simply imply that money was transferred into an account either domestically or internationally.

When you hear the term foreign inward remittance, then this is referring to money sent into an account by someone from abroad. An outward remittance is usually when someone who lives and works in a country other than their own, sends money home. This could be to pay ongoing financial commitments in their home country, such as a mortgage, or to support family members etc.

What is the Liberalized Remittance Scheme (LRS)?

  • Under the Liberalized Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both.
  • Further, resident individuals can avail of foreign exchange facility for the purposes mentioned in Para 1 of Schedule III of FEM (CAT) Amendment Rules 2015, dated May 26, 2015, within the limit of USD 2,50,000 only.
  • In case of remitter being a minor, the LRS declaration form must be countersigned by the minor’s natural guardian. The Scheme is not available to corporates, partnership firms, HUF, Trusts etc.

What do you mean by TCS?

Tax collected at source (TCS) is the tax payable by a seller which he collects from the buyer at the time of sale. Section 206C of the Income-tax act governs the goods on which the seller has to collect tax from the purchasers. The Income-tax Act mentions the particulars of goods on sale of which tax needed to be collected from the purchasers.

The person collecting tax has to obtain Tax collection Account Number and and quote it in all challans, certificates and returns or all other documents pertaining to the transactions. The buyer shall provide his Permanent Account Number (PAN) to the seller, failing which, higher tax shall be collected at the higher rate (twice or 5 percent whichever is higher).

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TCS announcements pertaining to foreign remittances in Union Budget 2020

  • As per the Finance Act of 2020 from 1st October 2020, funds sent abroad under the RBI’s liberalised remittance scheme are subject to TCS subject to certain conditions
  • A TCS of 5% was announced in Union Budget 2020. This rate is for foreign tour packages.
  • For other foreign remittances, it will apply only for an amount exceeding Rs 7 lakh.
  • However, in case of education-related foreign remittances funded by loans, a TCS of 0.5% will be levied for an amount above Rs 7 lakh.
  • While the rate of TCS is 5%, it will be 10% in case PAN or Aadhaar is not provided to an Authorised Dealer of the foreign exchange in question. In case of foreign travel, the TCS is collected by the travel operator.
  • The TCS will not be applicable if you make all arrangements of foreign tour on your own. It will also not apply if the remitter is subject to the TDS, under the Income Tax Act, 1961.
  • If tax has already been paid as TDS, and still TCS is levied, one can claim a refund from the TCS.
  • GST will not be applicable to the TCS amount
  • The remitter can also claim credit for the tax collected by the Bank while filing for their tax returns.
  • These TCS provisions will not be applicable, if a buyer is CG, SG, an embassy, a high commission, a legation, a commission, a consulate, the trade representation of a foreign state, a local authority or any other person as notified by CG

Who will collect the tax?

The Authorised Dealer (AD) of foreign exchange in question, typically the bank remitting the money will collect the tax and pay it to the Government. In case of a foreign tour, the travel operator is required to collect the TCS.

“Authorised dealer” means a person authorised by the Reserve Bank of India under sub-section (1) of section 10 of Foreign Exchange Management Act, 1999 to deal in foreign exchange or foreign security

Let us refer to the example given below to understand the TCS provisions:-

Mr. A has made remittance during FY 2020-21 as follows:

  • Transaction 1 – Rs. 5,00,000
  • Transaction 2 – Rs 8,00,000
  • Transaction 3 – Rs 1,50,000

TCS applicability transaction wise is as under:

  • Transaction 1 of Rs. 5,00,000 – No Tax will be collected since the amount is below Rs 7,00,000
  • Transaction 2 of Rs 8,00,000 – TCS will be applicable on Rs 6,00,000 [(Rs 5,00,000 + Rs 8,00,000 = Rs 13,00,000) – Rs 7,00,000 = Rs 6,00,000]
  • Transaction 3 of Rs 1,50,000 – TCS will be applicable on Rs 1,50,000 entirely since Rs 7,00,000 limit has been exceeded in transaction 2 only.

These provisions will affect, Indian students studying abroad, Indian tourists going abroad and Indian investors investing in stocks, bonds and property abroad will be impacted. It can raise the upfront cost of foreign education and travel, even though the tax can be subsequently claimed back as a refund while filing the income tax return.

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