Daybreak - Why your holidays abroad are going to cost more

Episode Date: February 10, 2023

Lately, Indians have been spending increased amounts of money on travelling to foreign countries. In the month of November last year, Indian travellers spent 1 billion dollars abroad. The government and even regulator RBI took notice of the new trend.And now, in the Union Budget 2023, a new tax has been added to overseas spending through the Liberalised Remittance Scheme (LTS).

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Are you planning a holiday abroad sometime this year? If so, I'm afraid I come bearing some not-so-great news. You see, Indians lately have been spending a lot of money on foreign trips. Take this. In November 2019, Indian travellers spent more than $500 million abroad. And in the same month, two years later, meaning last year, they spent double that amount. One billion dollars. Now, this also reflects in the share that travel now has in the total outward foreign remittances under the liberalized remittance scheme or LRS. From 35%, it has now gone up to 52% in the same period.

meaning more than half of the money that Indians are spending abroad is on travel. LRS, by the way, is the scheme that allows Indian residents, including those below 18 years, to freely spend up to $250,000 abroad every year for a variety of purposes. It could be anything from traveling, shopping, education to investments. Now, of course, this increase in Indian spending abroad can be partly attributed to the pandemic. people clearly seem to have gone back to holidaying with a vengeance. And it's all good. But it was not making the government very happy

because all this money was being spent and it was getting nothing out of it. In fact, it's not just the government but also the Reserve Bank of India or the RBI that has taken notice of this trend. So here's what the government has announced in the new budget. Any foreign spending for purposes other than education or medical treatment will invite a 20% tax.

And this will be tax collected at source or what we commonly refer to as TCS. Today, I will tell you all about this new tax why the government has introduced it and how it will work. Welcome to Daybreak, a new podcast from the Ken. I'm your host, Nidda Sharma, and I don't chase the news cycle. Instead, thrice a week on Mondays, Wednesdays, and Fridays, I will come to you with one business story

that is worth understanding and worth your time. Today is Friday the 10th of February. To begin with, let us go over the government's explanation of this new tax. While talking about it to the Indian Express, Finance Secretary T.V. Somanathan said that these measures were taken because people are making high value remittances, but their tax returns are not reflecting proportionate income tax payments. He said, and I'm quoting,

If you don't collect tax at source, then you have to take measures later to catch them. That is much more difficult. If you're able to make remittances to invest in a property in Manhattan or a stock brokerage account in Dubai, or if you're going to take a 30-day tour of the world, almost certainly your effective tax rate will be 20%. End quote.

And what does the government gain from this apart from the float income coming from the $1 billion that is being spent monthly? Float is basically duplicate money that is pretty present in the banking system during the time between when a deposit is made in the recipient's account and the money being deducted from the sender's account. So by introducing this new tax, not only does the government make float income, it also gets to discourage international tourism and promote domestic destinations. Next, I tell you how this new change will work. Say, for example, you have to spend one-lack rupees on your trip abroad. Your bank will charge your

20% TCS on this amount, which is 20,000 rupees. And this money will be collected at source or upfront by the bank. Also, an important point, this tax can be adjusted with the amount you pay as income tax later. For instance, you owe the government an income tax of 50,000 rupees, and you have paid 20,000 rupees as a tax for your trip abroad. Then your total income tax will calculate to 30,000 It is a paid now refund later kind of a deal. These changes will come into force from July this year. Now, just to make it clear, this tax is not just on your holidays abroad. It will be applicable on all foreign spending, like sending money to relatives or

investments like stocks and even buying property. Basically, any kind of foreign spending, excluding education and medical treatment. And it is not just infrequent expenses like international. travel that are going to be taxed like this. Even frequent transactions like international subscription, for example, a New York Times subscription, will now be taxed 20% at source. Now moving on to how the RBI reacted to this increase in Indian spending money in other countries. Like I mentioned earlier, it's not just the government who took note of the rise in foreign spending. Earlier this year, the Reserve Bank of India stopped SBM Bank from carrying out remittance.

transactions. SBM Bank India is a subsidiary of the State Bank of Mauritius. It was the first bank to receive a banking license from the RBI to set up a universal banking business in the country. Now, according to many, it is one of the fintech-friendly banks. The RBI said that it made the restriction due to material supervisory concerns in SBM's LRS operations. Because SBM is a regulated entity, it is responsible for

ensuring that users do not cross the $250,000 per year limit. But SBM had become the preferred partner for fintechs like Neo and in money that deal in remittance because it was the only bank that was not threatened by a new Forex fintech company. Other banks, meanwhile, already had thriving forex businesses which could have been undercut if they began supporting these new fintechs. Now, typically, debit cards and credit, cards used for international payments carry markup charges. These charges can be between 1.5 to 3.5%. But fintechs like Neo, which are essentially debit cards powered by SBM Bank, offer zero-forex markups. And this is why they gained volumes very quickly. By 2022, Neo had reached over 4 million users.

In Money 2 has grown to 5 million users in three years by letting people invest in US stocks, mutual funds and other assets. Coming up next, the consequences of this new tax on the liberalized remittance scheme. Arundati Ramanathan, deputy editor at the Ken, who wrote about this new tax in her latest newsletter, Kaching, spoke to some experts about it. And they told her that this new tax needs to be paid only if you are using an international debit card or Forex card. So if you're using a credit card, you will not have to pay the money.

this tax. Now obviously, this will tempt people to move all their international spending to credit cards. But Deepak Shanoi, the CEO and founder at Capital Mind, told Arundati that actually that may not be a wise move. Because on a credit card, you end up paying a slightly higher exchange rate. Plus, there is an interchange fee and GST. Add it all up and the total comes to around 3 to 5% of the transaction amount. You will not get this money back. With a few debit or Forex cards though, you may end up having to pay 20% more, but that money is ultimately refundable. Still, like Arundati says, 20% more upfront is a bittersweet bill to swallow. And finally, this new tax has also got startups a bit worried.

Because many of them use their debit cards to pay for Amazon Web Service bills and other software services. Now, they're facing the prospect of money. more working capital getting blocked off in order to budget for the new tax component. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps, and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website.

I'm Snik Daj Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.