Banks ready systems for capturing int'l credit card spends under LRS

Last year the government had announced that credit card spends in a foreign currency will be a part of LSR's annual limit of $2,50,000

Commercial banks are gearing up to capture overseas credit card spends under the liberalised remittance scheme (LRS) from April 1, even though their plea for a review of the issue is still pending with the government.

Last year, the government announced that credit card spends in a foreign currency would be a part of LRS’ annual limit of $250,000. Additionally, cardholders also have to pay tax collected at source (TCS) of up to 20 per cent for foreign transactions made through a credit card. The implementation of the scheme was deferred following representations from industry players.

Even as banks await a response from the government, they have put a system in place to capture such transactions under LRS.

“Banks are largely prepared to roll it out from April 1,” said an executive of a private bank who handles the credit card portfolio. “Banks have to create a customer data warehouse at the backend and ensure that all remittances made through different methods are aggregated, and then the corresponding tax deduction is applied,” the person added.

The government had said that there would be no change in the rate of TCS for all purposes under LRS and for overseas travel tour packages, regardless of the mode of payment, for amounts up to Rs 7 lakh per individual per annum.

A tax of 20 per cent was proposed for all other purposes under LRS except medical treatment and education, where the tax rate was significantly lower.

According to experts, there are multiple concerns associated with international credit card spending being included in the LRS, such as how banks will track the end use of credit card spending and if it is used for medical purposes, how it will be categorised.

“There is ambiguity regarding transactions made in foreign currency while sitting in India, such as expenditure incurred by subscribing to foreign newspapers or magazines which will be paid in dollars; will that be included in LRS,” said Saurabh Bhalerao, associate director, CareEdge Ratings.

“Additionally, ensuring proper allocation of LRS limits will be challenging, particularly when multiple users are involved. If a person spends Rs 5 lakh on a holiday which is for him and his family, will the entire Rs 5 lakh be accounted against his name, or will it be allocated against each member of the family who went on that holiday?” Bhalerao asked.

Also, there is no clarity on how the LRS distinguishes between the expenses incurred on corporate credit cards and personal credit cards, particularly if personal credit cards are used for business purposes.

The objective of the move to include overseas credit card spends under LRS was to discourage large foreign exchange outflows, as remittances under LRS have risen sharply in the past few years.

According to data released by the Reserve Bank of India, outward remittance under LRS was $27.42 billion in the April–January period of 2023-24, which was 24 per cent higher than the $22.08 billion remitted in the year-ago period.