The Union Budget 2023 has announced a major change to the Liberalized Remittance Scheme (LRS) by introducing a new Tax Collection at Source (TCS) for foreign outward remittances.
This change has sparked discussions among investors and companies who frequently use the LRS for various purposes. However, it is important to understand what LRS is and how the proposed increase in TCS rate will affect it.
Before we dive deep into the topic, lets understand what LRS is.
The LRS is a scheme introduced by the Reserve Bank of India (RBI) in 2004 that enables Indian residents to remit money abroad for various purposes, including investments in listed equities, real estate, and education or medical purposes. The LRS has been a popular channel for Indian residents to invest abroad.
The proposed increase in TCS for foreign outward remittances may make the LRS less attractive for some investors as it would significantly increase the cost of remitting money abroad. This proposed change is expected to impact a large number of individuals and companies who utilize the LRS for various purposes.
What does the TCS rate look like?
The new TCS of 20% will be applicable on foreign outward remittances under the LRS for all purposes other than education and medical purposes, effective from July 1, 2023. This is a sharp increase from the previous TCS rate of 5% which was applicable on foreign outward remittances above INR 7 lakhs. The TCS will be collected by banks and other authorized dealers at the time of remittance and will be credited to the government’s account.
It is important to note that the proposed increase in TCS rate for foreign outward remittance does not apply to investments made through the Overseas Direct Investment (ODI) route.
What is the ODI route?
The ODI route is a popular channel for Indian companies looking to expand their operations overseas. ODI allows companies or individuals to expand their operations and diversify their investment portfolio beyond their domestic market. It can also provide access to new technologies, resources, and markets.
How is the ODI route better than the LRS?
One of the key benefits of the ODI route is that it allows Indian companies to invest in overseas companies or set up subsidiaries through automatic route subject to certain conditions. Currently, there is no TCS applicable on remittances made under the ODI route. The ODI route has been a popular choice for Indian companies looking to expand their operations overseas, as it allows them to invest abroad without incurring the additional cost of TCS.
LRS Vs ODI – Key Differences in a Nutshell
Purpose:
The LRS is mainly used for personal investments or expenses, such as education or medical expenses, while the ODI route is used for business purposes, such as overseas investment and setting up subsidiaries abroad.
Limits:
The LRS has a limit of $250,000 per financial year per individual, while the ODI route has no such limit. This means that individuals can remit up to $250,000 per year through the LRS, while companies can invest any amount they desire through the ODI route.
Conditions:
The ODI route has certain conditions that need to be fulfilled, such as a minimum net worth requirement and restrictions on the end use of the funds. The LRS has fewer conditions to fulfil, but the funds can only be used for specific purposes, such as personal investments or expenses.
Regulatory framework:
The LRS is regulated by the Reserve Bank of India (RBI), while the ODI route is regulated by RBI and the Ministry of Corporate Affairs / the Securities and Exchange Board of India (SEBI). This means that individuals using the LRS need to adhere to RBI regulations, while companies using the ODI route need to adhere to regulations set by multiple government bodies.
