Saturday, July 1, 2023

Government Reinstates Rule 7 to Exclude International Credit Card Usage Abroad from LRS

 Government Reinstates Rule 7 to FEM (CAT) Rules, 2000

The Indian government has made changes to the Foreign Exchange Management (Current Account Transactions) Rules, 2000, by reinstating Rule 7. This rule excludes the usage of International Credit Cards (ICC) abroad from the purview of the Liberalized Remittance Scheme (LRS). The reinstatement came into effect on May 16, 2023.

Background of the Changes

Previously, on May 16, 2023, the government issued a notification (No. G.S.R 369(E)) that omitted Rule 7 of the CAT rules, 2000. This omission included the use of ICC abroad under the LRS.

However, the government later realized that banks were facing difficulties in upgrading their systems to comply with the new norms. In light of this, the implementation of the omission notification was postponed.

Reinstatement of Rule 7

Considering the challenges faced by banks, the government has now reinstated Rule 7. This means that the usage of ICC abroad for making payments towards expenses during an overseas visit is not included in the LRS limit. The reinstatement of Rule 7 came into effect on May 16, 2023.

Uniformity and Prevention of LRS Limits Bypass

The government's decision to omit Rule 7 initially was aimed at bringing uniformity to the treatment of International Credit Card (ICC) and International Debit Card (IDC) transactions under the LRS. With the omission of Rule 7, the limit for ICC transactions during foreign travel would have been capped at USD 2,50,000, similar to IDC transactions.

However, in order to provide sufficient time for banks and card networks to implement the necessary IT-based solutions, the government postponed the applicability of the amended norms through a press release dated June 28, 2023. As a result, the government reinstated Rule 7 through Notification No. G.S.R. 472(E) on June 30, 2023.

Clarification on Foreign Transactions Using ICC

It is important to note that when a foreign transaction is made using an international credit card while being in India, it is treated as a remittance under the Liberalized Remittance Scheme (LRS). Therefore, such transactions are subject to Tax Collected at Source (TCS).

These changes aim to streamline the regulations governing the usage of International Credit Cards (ICC) abroad and ensure clarity for individuals and banks involved in foreign transactions.