In light of recent updates surrounding Tax Collection at Source (TCS) and the confusion surrounding the implementation of a new clause from 1st October 2023, we aim to provide you with a comprehensive overview. The government’s latest notification regarding TCS, which was planned to go-live on 1st July, has raised numerous queries among taxpayers. It is our endeavour through this article to keep you informed about the latest updates, shed light on the new regulations, and resolve any lingering questions you may have.
This article by Finsmart Accounting – the leading accounting outsourcing firm in India – is divided into two parts for your convenience. If you wish to directly access the second part, simply click on the provided link.
Understanding the new foreign remittance notification
There are 3 key terms that you need to know about the new foreign remittance update regarding tax collection at source relevant for 2023:
Lets first understand TCS:
Tax Collection at Source (TCS) is a method used in India to collect tax directly from certain transactions. Instead of deducting tax from the payment made to someone, the person receiving the payment collects the tax amount from the payer and gives it to the government.
The tax collected at source is considered as a credit for the payer, which can be used to reduce their final tax amount when they file their tax return. The payer can also use the TCS certificate as proof of tax already paid.
TCS, similar to TDS, can be understood as a form of advance tax that is paid directly to the government.
Liberalised Remittance Scheme (LRS) is a facility provided by the Reserve Bank of India (RBI) that allows individuals in India to remit money abroad for certain purposes. In simple terms, it is a rule that permits Indian residents to send a limited amount of money outside the country for specific purposes.
The purpose of the LRS scheme is to enable individuals to diversify their investments, acquire assets, or fulfil personal obligations outside India. It allows residents to transfer funds abroad for activities like education, medical treatment, travel, investments, purchase of property, or gifts to relatives.
Under the LRS scheme, individuals can remit a certain amount of money each financial year without seeking prior approval from the RBI. The limit is periodically reviewed and revised by the RBI. Current limit is set at USD 250,000 per financial year per individual. This means an Indian resident can send up to USD 250,000 abroad in a year without needing special permission.
Note:This foreign remittance scheme is for individuals and not for corporates, partnership firms, HUF or Trustee etc.
Tax Rates or TCS under the LRS. The primary notification pertains to the modifications in tax rates, specifically the TCS rates. The table below presents detailed information regarding the existing and revised rates, providing a comprehensive overview
Earlier and new TCS rates are summarised as under:
|Nature of payment(1)||Earlier rate before Finance Act, 2023(2)||New rate w.e.f 1st October 2023(3)|
|LRS for education financed by loan||Nil upto Rs 7 lakh 0.5% above Rs 7 Lakh||Nil upto Rs 7 lakh 0.5% above Rs 7 Lakh|
|LRS for Medical treatment/ education (other than financed by loan)||Nil upto Rs 7 lakh 5% above Rs 7 Lakh||Nil upto Rs 7 lakh 5% above Rs 7 Lakh|
|LRS for other purposes||Nil upto Rs 7 lakh 5% above Rs 7 Lakh||Nil upto Rs 7 lakh 20% above Rs 7 Lakh|
|Purchase of Overseas tour program package||5% (without threshold)||5% till Rs 7 Lakh, 20% thereafter|
|Transaction through International Debit/Credit Card while being overseas||Nil||Nil (To give adequate time to Banks and Card networks to put in place requisite IT based solutions, Government has postpone this type of transaction)|
1. Threshold limit of ₹7 lakh per financial year mentioned above is aggregate threshold of forex availed (Outward Remittances, Forex Prepaid cards, Currency, and Foreign currency Demand Drafts)
2. PAN should be valid and operative from July 1, 2023 i.e., the Bank will check validity of PAN in terms, whether Aadhaar is linked to PAN or not. In case PAN is inoperative, TCS would be charged at the rate applicable to non-PAN case.
Okay, we are done with the latest update on foreign remittance on tax collection at source. Now, let’s look at how we can avoid TCS deductions while undertaking international deductions.
Best Practices for International Expenses
Best practices for international expenses to avoid Tax Collection at Source (TCS) deductions in 2023 are as follows:
- Clearly define corporate policies: Establish clear policies and guidelines regarding international expenses, ensuring that employees understand the criteria for using corporate cards and figuring out which expenses are eligible.
- Provide corporate cards: Issue corporate credit/debit cards specifically designated for international expenses. This helps segregate personal and business transactions, reducing the likelihood of TCS deductions.
- Emphasize business-purpose usage: Educate employees about the importance of using corporate cards solely for business-related expenses during international travel. Encourage them to avoid personal expenditures to prevent any confusion or potential TCS deductions.
- Maintain accurate records: Maintain detailed records of international expenses, including receipts, invoices, and any supporting documentation. This documentation will serve as evidence of business-related expenses, allowing for proper expense reporting and reconciliation.
- Separate personal and business expenses: Ensure that employees understand the distinction between personal and business expenses, and encourage them to use personal payment methods for personal expenses during international trips. This separation will minimize the chances of TCS deductions.
- Proper expense reporting: Implement a robust expense reporting system where employees can clearly document and categorize their international expenses. This system should facilitate easy identification and tracking of business-related expenditures, providing a clear audit trail if needed.
Foreign Remittance Update on Tax Collection at Source
We hope that the above article addresses all the queries regarding foreign remittance update on tax collection at source. If there’s something that you are still unclear about, we are here to help. Drop us an email with your queries and our team of accountants will reach out with the answers.
Finsmart Accounting with its 15 years of outsourced accounting is a one-stop solution for all accounting, taxation, and outsourced payroll needs for growing business enterprises. Our customer-centric service models, domain expertise, and use of the latest tools & technology have truly helped us to establish ourselves as ‘Trusted FinOps Partner’.
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Mrs. Dipali Phadke is the Chief Executive Officer of Finsmart Solutions & is the back bone of the company’s operations. A qualified Chartered Accountant with more than 12 years of experience in the field of Accounting, Taxation and Audit.