The Indian administration has always been favourable towards accounting every transaction in order to make the Indian financial system more systematic and achieve financial inclusion similar to the financial culture followed in western countries. In order to account all intra-country transactions, the Modi-led government has approached public and private sector banks to push customers for executing their all transactions right from paying for grocery and recurring monthly payments to every business dealings. However, the surveillance over the foreign remittances was difficult as taxpayers were not displaying the foreign transactions while filing for income tax returns.
To curtail the tax avoidance by assesses, the Indian administration has introduced Tax collection at source (TCS) a new sub-section (1G) in Section 206C under Finance Act, 2020 which will be implemented from October 01, 2020. The introduction of new guidelines will bring taxes into the hands of government at the time of making payments, which will eradicate the hindrance of tax avoidance on foreign remittances and payments.
The rookie sub-section (1G) has brought a tax bracket of 5% on foreign remittances made above 7 lakhs under Liberalized Remittance Scheme drawn by Reserve Bank of India. The government has not left the foreign tour packages out of the purview and has inculcated them too into the tax bracket. However, the remittance made out of loan taken for higher education will be taxed at 0.5%. Under the purview of Reserve Bank of India’s liberalized remittances scheme, individuals cannot remit more than any amount of $250,000 abroad every year. Moreover, individuals cannot buy and sell foreign exchange abroad and lottery tickets.
How much you will be taxed: Supposed an individual makes a foreign remittance of 15 lakhs. As per the Liberalized Remittance Scheme of Reserve Bank of India, the individual will be liable to pay for 5% @(15 Lakhs minus 7 Lakhs = 8 Lakhs) which will result into Rs.40,000 as Tax Collected at Source (TCS) unless the tax is not deducted at source of the income.
The introduction of Tax Collection at Source (TCS) on foreign remittances will restrict the individuals who used to go on fancy foreign tours every spring but never paid taxes. This has been a major move by the administration to get many tax evasion transactions accounted. Moreover, it will help the government to understand deeply the spending pattern of individuals towards foreign products.