Get ready to spend more initially, if you are planning a holiday abroad or aspiring to pursue higher studies in a foreign university, or remittance for specified investments abroad. Budget 2020 has imposed a 5% tax collection at source (TCS) on payment to tour operators for foreign travel. Authorized dealers (ADs) of foreign exchange (typically banks) will collect this amount. If PAN is not provided to the AD, TCS will be collected at 10%. It has also imposed a 5% TCS on payments above ₹7 lakh a year under the Liberalised Remittance Scheme (LRS).
“LRS includes some capital and current transactions,” said Prakash Hegde, a Bengaluru-based chartered accountant. A capital transaction is an investment in stocks or property. A current transaction is payment for foreign education or medical treatment. “TCS will apply to both,” said Hegde.
The budget imposes a 5% TCS on booking foreign tour packages. “This will not apply if you book hotels, flights and other expenses separately,” said Hegde. “The requirement can’t be practically imposed on foreign travel websites, hotels or other travel firms. Hence, there may be a possible advantage in favour of foreign entities vis-a-vis Indian entities in the tourism space,” Hegde added.
Dutt interprets the TCS provision in a different manner. “TCS will be collected by AD on behalf of the foreign tour operator and not the end consumer. The operator will have to file returns to claim refund. Some operators may decide to pass the added compliance costs to the customers,” Dutt added.
Those who are liable for a lower rate of tax can claim a refund while filing returns, said Naveen Wadhwa, deputy general manager, research and development, Taxmann Publications.
“We are awaiting clarity on whether all types of LRS transactions will be taxable, including both capital and current account transactions. For example, if you already have a bank account abroad and are merely transferring money to yourself, will it be a taxable remittance?” asked Sitashwa Srivastava, founder and CEO, Stockal, an investment platform targeted at Indians who invest in foreign stocks through LRS.
The added compliance will hit investments in foreign stocks through LRS in the short term. Viram Shah, co-founder and CEO, Vested Finance, a US SEC-registered financial adviser which provides advice on foreign portfolios of Indians, said that while the 5% TCS will apply to initial transfers for investments in foreign stocks, it won’t apply to gains that can be used for foreign studies and travel.
Outflows in LRS, including foreign education, maintenance of relatives, gifts, travel and investment rose from $1.09 billion in FY15 to $11.34 billion in FY19, according to Reserve Bank of India data. The largest component of LRS was foreign travel ($4.8 billion) in FY19, followed by foreign studies ($3.5 billion). TCS curbs may reduce this outflow. It will also add paperwork and costs for consumers.