Foreign Education, Tour Will Become Costly After April 1st: How To Avoid Paying Extra Taxes?

As per the reports coming in, now you need 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. 

How Did This Happen?

The Budget 2020 has imposed a 5% tax collection at source (TCS) on payment to tour operators for foreign travel and authorized dealers (ADs) of foreign exchange (typically banks) will collect this amount. 

In case if PAN is not provided to the AD, TCS will be collected at 10%. 

Not only that, it has also imposed a 5% TCS on payments above ?7 lakh a year under the Liberalised Remittance Scheme (LRS).

What Does The Expert Say?

A Bengaluru-based chartered accountant, Prakash Hegde said “LRS includes some capital and current transactions,”. 

A capital transaction is an investment in stocks or property and a current transaction is payment for foreign education or medical treatment. “TCS will apply to both,” he said.

He said that the budget imposes a 5% TCS on booking foreign tour packages. “This will not apply if you book hotels, flights and other expenses separately,” he added.

He said  “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,”.

While Dutt interprets the TCS provision in a different manner saying “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 a refund. Some operators may decide to pass the added compliance costs to the customers,” .

The deputy general manager, research and development, Taxmann Publications, Naveen Wadhwa said that those who are liable for a lower rate of tax can claim a refund while filing returns.

Further, the founder and CEO Stockal – an investment platform targeted at Indians who invest in foreign stocks through LRS,  Sitashwa Srivastava asked “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?”.

How Will This Affect?

It is expected that the added compliance will hit investments in foreign stocks through LRS in the short term. 

The co-founder and CEO, Vested Finance – a US SEC-registered financial adviser which provides advice on foreign portfolios of Indians, Viram Shah 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.

According to Reserve Bank of India data, the 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.

Considering FY19, the largest component of LRS was foreign travel ($4.8 billion), followed by foreign studies ($3.5 billion). 

So, TCS curbs may reduce this outflow and will also add paperwork and costs for consumers.