On May 16, the Ministry of Finance came out with the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023 (FEMA). This amendment removes Rule 7 from the Foreign Exchange Management (Current Account Transactions) Rules, 2000, and brings international credit card transactions under the scope of the Liberalised Remittance Scheme (LRS). Post this amendment, any foreign remittance above $250,000 made through a credit card will require prior approval from RBI. Separately, the Budget 2023-24 released by the government in February this year increased the tax collected at source (TCS) for foreign remittances under LRS, except for medical treatment and educational purposes, from 5% to 20% without any threshold limit on the remittance amount. This goes into effect on July 1. Before this, the tax rate for all transactions of up to Rs. 7 lakhs was 5%. Now, putting this in the context of the May 16th FEMA Amendment, all international credit card transactions would also be taxed at 20%. What is Rule 7? Rule 7 of the FEMA Rules, 2000, says that nothing contained in Rule 5 will apply to the use of International Credit Cards used for making payments while outside of India. Rule 5, in turn, sets a transaction limit of $250,000 (post which the Reserve Bank of India must approve the transaction) for forex transfers for the following purposes (as mentioned in Schedule 3): Private visit to any country (besides Nepal and Bhutan) Gift or donation Going abroad for employment Emigration Maintenance of close relatives abroad Travel…
