By Sandeep Jhunjhunwala
Till now, Tax Collection at Source (TCS) applied to selected transactions involving prescribed goods and services whereas Tax Deduction at Source (TDS) applied to numerous transactions. The Finance Act 2020 has now brought in three new provisions of TCS that will be applicable from October 1, 2020. Firstly, 5% TCS would apply on amounts exceeding Rs 7 lakh in a financial year (FY) for foreign remittances under the Liberalised Remittance Scheme (LRS) of Reserve Bank of India. Restricted TCS of 0.5% would apply in case for remittances towards loans for pursuing education. Secondly, 5% TCS is applicable on purchase of overseas tour package, irrespective of its value. Third, TCS at 0.1% on sale of goods for over Rs 50 lakh in a year. Inflated rates of TCS have been prescribed for non-PAN/ Aadhaar cases. As this announcement was a bolt from the blue, it is important to understand the nitty-gritties of the new provision.
Categories of foreign remittances under 5% LRS-TCS
LRS permits capital account transactions such as purchase of property, making investments abroad, extending loans to NRIs, etc., as well as current account transactions for private or employment visits, business trips, gifts, donation, medical treatment, maintenance of close relatives, etc., subject to a maximum of $2,50,000 per FY. Wire transfer for purchasing of articles on international e-commerce websites via credit cards are also included in this scheme. New TCS provisions will be applicable on all these foreign remittances allowed under LRS of RBI. No threshold limit has been prescribed for foreign tour operators to collect TCS.
Ceiling limit of Rs 7 lakh for foreign remittances is only a threshold for collection of tax by the authorised dealer banker and is independent of the LRS under which the resident individuals are allowed to freely make foreign remittance up to $2,50,000 per FY. Where the threshold on Rs 7 lakh is crossed, bankers would be liable to collect 5% TCS and deposit it with the government. The incidence of this new TCS is on the remitter. Although creditable while filing ITR, overall transfer value would shoot up by 5%, in addition to ingrained remittance costs such as bank charges and currency spreads.
TCS is not applicable if the remitter is subject to withholding tax under the Indian tax laws. Foreign remittance as gifts to NRI is taxable in India from July 2019 and TDS is applicable on the same, except for gifts to a relative NRIs below Rs 50,000. Hence, where TDS is not applicable, TCS would apply on gifts to NRIs subject to a threshold of Rs 7 lakh.
Permissible capital account transactions by an individual under LRS includes investment abroad by acquiring or holding shares of listed and unlisted overseas companies and debt instruments, subject to a maximum of $2,50,000 per FY. Remittance for investing in shares of companies abroad, including startups are covered under LRS. Where such remittance is over Rs 7 lakh in a FY,TCS at 5% will be applicable.
TCS credit is available for set-off against total tax liability of the remitter for the respective FY. The new Annual Information Statement (Form 26AS) captures details of tax collected TCS during FY. The remitter should also obtain TCS certificate from authorised dealer banker and claim such TCS paid in the ITR or request refunds in case of lower or nil tax liability.