From July 1, 2023, individuals investing abroad or planning foreign tours will face a significant increase in tax liabilities. The recent budget proposal mandates a higher tax rate on outward remittances, excluding medical treatment and education expenses. The new tax collected at source (TCS) of 20% on the entire remittance amount, as opposed to the previous 5% TCS on remittances exceeding Rs. 7 lakh, will have far-reaching consequences. Let’s explore how these changes will affect the way money is sent abroad.
Changes in Remittance Taxation: Under the revised regulations, individuals availing overseas tour packages will now bear a TCS of 20% on the total amount, instead of the previous 5% on the entire sum. For instance, if you spend Rs. 4 lakh on an international tour, a TCS of Rs. 80,000 will be applicable from July 1, compared to the previous TCS deduction of only Rs. 20,000. Similarly, for remittances aimed at purposes other than education and medical treatment, a 20% TCS will be levied on the entire amount, rather than the previous 5% on the portion exceeding Rs. 7 lakh. This implies that remitting Rs. 8 lakh abroad for investments or maintaining relatives will now incur a TCS of Rs. 1.6 lakh, instead of just Rs. 5,000.
Impact on Remittance Planning: The revised taxation policy will significantly impact how individuals plan their remittances abroad. It will increase the cost of international tour packages and raise the initial expenses of foreign investments. Vishal Suri, Managing Director of SOTC Travel Limited, expresses concern about the added tax burden on outbound travelers and the negative impact on tour operators recovering from the pandemic. Moreover, platforms offering international stocks and crypto exchanges, as highlighted by Nithin Kamath, Founder of Zerodha, will face adverse effects due to these changes, rendering such investments less viable.
Adjustment and Cash Flow Issues: While the revised TCS can be adjusted against an individual’s tax liability at the time of filing income tax returns, it introduces cash flow challenges. The TCS certificate provided by banks during deduction can be utilized while claiming the TCS in the income tax return filing. However, this means a larger sum will remain blocked until a refund can be availed. For example, if a TCS of Rs. 80,000 is applicable on a remittance of Rs. 4 lakh, and the overall tax liability is Rs. 60,000, the individual can adjust the TCS amount against the tax liability and claim a refund of Rs. 20,000. However, the refund will only be received after the tax filing season ends, causing cash flow issues. Individuals with higher tax liabilities will experience a reduced net tax liability after adjusting the TCS amount.
Concerns and Alternatives: Madhavan Menon, Chairman & Managing Director of Thomas Cook (India) Limited, highlights that the higher tax rates will lead to increased upfront cash outflows for end customers, potentially driving them to explore alternate channels outside the domestic tax net. Amit Maheshwari, Tax Partner at AKM Global, emphasizes that remittances for lodging and living expenses of students studying abroad will now face a steeper 20% TCS, without any threshold. This places an additional burden on parents supporting their children’s education overseas.
