Ministry issues FAQs: Business-trip credit card use for firms outside tighter LRS rule

Use of international credit cards by employees of a company, where the expenditure is borne by the company, will not be included in the liberalised remittance scheme (LRS) and will not be subject to an annual cap of $2,50,000.

In a set of FAQs on Thursday, the finance ministry clarified that LRS will not cover business visits of employees. “When an employee is being deputed by an entity for any of the above, and the expenses are borne by the latter, such expenses shall be treated as residual current account transactions outside LRS, and may be permitted by the Authorised Dealer without any limit, subject to verifying the bona fide of the transaction,” said the ministry.

However, payments on a foreign e-commerce website through an international credit card even if the person is not abroad are already part of the LRS cap. This will also be subject to the new 20% tax collected at source, from July 1, as against 5% now.

Experts welcomed the clarifications. “Where an employee’s overseas work travel expenses are borne by the employer, the LRS regulations excluded such expenses from the LRS limits of the employee. This exclusion which was a part of the LRS regulations has been reiterated in the FAQs.

Consequently, business travel expenses borne by the employee would be considered under LRS and that borne by the employer falls out of LRS club,” said Sandeep Jhunjhunwala, Partner, Nangia Andersen

He however, noted that practical challenges could be faced in ascertaining whether an employee’s travel is a business travel or not. “Also, testing of whether the expenses are borne by the employer to effectively apply the exclusion, could be a daunting exercise especially where the payments are not routed through the AD Banker and effected through credit cards,” he said.

In the FAQs, the ministry clarified that the changes are intended to bring in parity in tax treatment of remittances using debit and credit cards. The RBI had also written to the government on more than one occasion, pointing to the need to remove this differential treatment.

“Data collected from top money remitters under LRS reveals that international credit cards are being issued with limits in excess of the present LRS limit of $2,50,000,” it said, while noting that payments by debit cards have been treated as LRS even earlier.

Due to the exemption under erstwhile Rule 7, expenditures through credit cards were not accounted for under the specified LRS limit, which has led to some individuals exceeding the LRS limits.

“The differential treatment between debit cards and credit cards needed to be removed in the interest of uniformity and equity in the treatment of modes of drawal of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits,” it said.

The finance ministry had notified changes to the Foreign Exchange Management (Current Account Transactions) Rules, 2000 effective May 16 under which use of credit cards by Indians while on foreign visit came under the ambit of the LRS overseen by the RBI. The higher TCS rate, according to the Finance Act 2023, will take effect from July 1.

The FAQ also clarified that TCS of 5% will be levied on expenses exceeding Rs 7 lakh towards medical treatment and education, while other expenses including investment in real estate, foreign tour and travel would attract 20%. A detailed clarification will be issued separately.

Under the LRS, in the financial year 2021-22, a total of $19.61 billion was remitted, rising from $12.68 billion in 2020-21. In 2022-23, it rose to over 24 billion, of which overseas travel accounted for more than half, said the ministry.