Understanding the Impact of FEMA on Indian Credit Card Usage Abroad.

Overview

The FEMA Act replaced the earlier Foreign Exchange Regulation Act (FERA) in 1999 and introduced a more liberalized approach to foreign exchange transactions. The primary objectives of FEMA are to facilitate external trade and payments, ensure the orderly maintenance of the foreign exchange market, and promote the development and management of India's foreign exchange reserves.

FEMA establishes a framework for the regulation and control of foreign exchange transactions. It classifies transactions into two broad categories: current account transactions and capital account transactions. Current account transactions primarily involve trade in goods and services, while capital account transactions deal with investments, borrowings, and remittances.

In this article, we will delve into the implications for cardholders when using Indian credit cards abroad for current account transactions. Specifically, we will discuss how these transactions fall under the purview of FEMA and examine the potential consequences for individuals using their Indian credit cards for such purposes outside of India.

Credit Cards and LRS Limits

On May 16, the Ministry notified the Foreign Exchange Management (Current Account Transactions) (Amendment)Rules,2023 to include international credit card transactions in the LRS. Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, has been omitted and thus effectively included forex spending through international credits under the LRS. Foreign credit card transactions will attract TCS at the rate of 20 percent from 1st July which is at the rate of 5 percent currently. The exceptions to the tax are credit card usage for medical and educational purpose.

The Ministry of Finance has incorporated the utilization of credit cards by Indian residents abroad within the $250,000 limit established for remittances overseas in a year under the liberalised remittance scheme (LRS). Previously, the use of credit cards by resident Indians during foreign travel was not subject to the $250,000 cap, as per the provision outlined in the Foreign Exchange Management (Current Account Transactions) Rules, 2000. Any transaction beyond $250,000 would require approval from RBI. The purpose of the $250,000 cap in the LRS is to preserve foreign exchange reserves, prevent capital flight, regulate individual foreign investments, combat money laundering, encourage domestic investments, and ensure macroeconomic stability.

The Collection Process of 20% TCS

The bank or financial institution responsible for issuing the international credit will collect the 20% TCS. They will request an additional 20% amount from the credit card holder, which will be deposited as TCS with the government. The collected TCS will be deposited into the credit card holder's Permanent Account Number (PAN). To claim the TCS, it can be included in the income tax return filed for the financial year when the remittance was made. For the credit to be claimed, the bank will need to issue a TCS certificate.

Applicability of FEMA to Indian Credit Cards Abroad

FEMA applies to all Indian residents, as well as Indian companies and entities, with respect to their foreign exchange transactions. This includes the use of credit cards issued by Indian banks for transactions conducted outside India. Indian credit cardholders must adhere to FEMA guidelines when using their cards overseas to ensure compliance with the law.

Schedule 1 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 state the transactions which are prohibited.

The transactions which are restricted are as follows:

• Remittance out of lottery winnings.

• Remittance of income from racing/riding, etc., or any other hobby.

• Remittance for purchase of lottery tickets, banned/prescribed magazines, football pools, sweepstakes etc.

• Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies.

• Remittance of dividend by any company to which the requirement of dividend balancing is applicable.

• Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice value of exports of tea and tobacco.

• Payment related to "Call Back Services" of telephones.

• Remittance of interest income on funds held in Non-resident Special Rupee Scheme a/c.

Penalties for Non-Compliance with FEMA

Penalties for Non-Compliance with FEMA Provisions:

Non-compliance with FEMA regulations can result in monetary penalties. The exact amount of the fine may vary depending on the nature and severity of the violation. The penalties imposed can range from a percentage of the amount involved in the contravention to fixed monetary fines. In certain cases of non-compliance, authorities may have the power to confiscate the funds or assets involved in the violation. Confiscation can occur when the transaction is deemed illegal or in contravention of FEMA provisions. Serious violations of FEMA can lead to legal consequences, including prosecution. Entities or individuals found to be in non-compliance with FEMA may face additional penalties such as the suspension or cancellation of licenses or permissions granted by regulatory authorities.

Penalties for non-compliance with FEMA can be substantial, and their enforcement is taken seriously to ensure compliance with foreign exchange regulations.

Conclusion

In conclusion, the Foreign Exchange Management Act (FEMA) of 1999 replaced the earlier Foreign Exchange Regulation Act (FERA) and brought about a more liberalized approach to foreign exchange transactions in India. FEMA aims to facilitate external trade and payments, maintain the orderly functioning of the foreign exchange market, and develop and manage the country's foreign exchange reserves.

Under FEMA, foreign exchange transactions are categorized into current account transactions and capital account transactions. Current account transactions involve trade in goods and services, while capital account transactions encompass investments, borrowings, and remittances.

This article specifically focuses on the implications for cardholders using Indian credit cards abroad for current account transactions under FEMA. The recent amendment to the Foreign Exchange Management (Current Account Transactions) Rules now includes international credit card transactions in the Liberalised Remittance Scheme (LRS), subjecting them to the $250,000 annual limit. Starting from July 1st, foreign credit card transactions will also attract a 20% Tax Collected at Source (TCS), except for medical and educational purposes.

To comply with FEMA guidelines, Indian credit cardholders must ensure their overseas transactions align with the law. Any non-compliance with FEMA regulations may result in penalties, including monetary fines, confiscation of funds or assets involved in the violation, and potential legal consequences such as prosecution or suspension/cancellation of licenses or permissions granted by regulatory authorities.

It is crucial for individuals and entities to be aware of and abide by FEMA provisions to ensure compliance with foreign exchange regulations and avoid the substantial penalties associated with non-compliance.