Understanding GST and Foreign Remittances in India: A Comprehensive Guide

The Goods and Services Tax (GST) is a significant addition to India's taxation system. While it mainly applies to the supply of goods and services within India, the applicability of GST to foreign remittances is a distinct issue. In this article, we will explore when GST applies to foreign remittances, the introduction of the Tax Collected at Source (TCS) for high-value foreign remittances, and how to utilize TCS for tax optimization purposes.

Nature of Transaction and GST

Foreign remittances typically involve the transfer of money from one country to another, which is not classified as a supply of goods or services under the GST framework. Therefore, these transactions are generally exempt from GST. However, there are specific scenarios where GST may apply.

For instance, if the remittance is linked to the export of services, such as payment for services provided to a foreign client, these services can be treated as exports and are zero-rated under GST. In banking or financial services, such as processing fees charged by banks for facilitating the remittance, these are subject to GST. Always consult a tax professional for specific rules and advice.

Regulatory Framework

Transactions involving foreign remittances are primarily governed by the Foreign Exchange Management Act (FEMA) and other guidelines set by the Reserve Bank of India (RBI).

The Introduction of TCS for High-Value Foreign Remittances

The Government of India introduced a Tax Collected at Source (TCS) on foreign remittances made through the Liberalised Remittance Scheme (LRS) above INR 7 lakh from October 1st, 2020. This rule was implemented to widen the tax net and collect taxes from individuals who had previously evaded tax by not filing income tax returns.

Here’s a breakdown of why the government introduced this TCS:

According to a study conducted by the Income-tax Department, a large number of individuals sending money abroad were not filing income tax returns. While one would expect them to pay income taxes, 1807 out of 5026 cases of foreign remittances did not file returns. The TCS rule is not meant to burden existing taxpayers but to ensure that individuals who have not been paying taxes start contributing to the exchequer.

How the TCS Works

Under the new rule, authorized dealers typically banks and remittance companies will collect 5% of TCS on remittances made through LRS above INR 7 lakh in a financial year (April to March).

Here are two important notes to keep in mind:

The 5% TCS is deducted only on the amount above INR 7 lakh. For example, if you remit INR 10 lakh in a year, 5% will be calculated on 3 lakh, which is INR 15,000. For the current financial year, any remittances made post-March 2020 will count towards the 7 lakh threshold. For instance, if you have transferred INR 6 lakh before October 2020 and you transfer additional INR 5 lakh after October 2020, the TCS will be calculated on INR 11 lakh - INR 7 lakh INR 4 lakh. Therefore, 5% of INR 4 lakh, which is INR 20,000, will be debited as TCS. No back-dated TCS is needed for remittances made before October 2020.

The Applicability to Investing in Equities Abroad

TCS shall be applicable to all remittances under LRS, including investments in equities abroad, which falls under the S0001 purpose code. Here’s a quick summary of TCS applicable by purpose:

LRS Purpose Codes:

S0001: Investments in equities Other