3 July 2023
We recently sent out an alert informing companies that a Tax Collected at Source (TCS) of 20% was going to be applied to any overseas remittance of participant funds in India from 1 July 2023.
This was following:
- an announcement that:
* the existing TCS rate of 5% was being increased to 20%; and
* the previous threshold of INR700,000 for the TCS to apply, was being removed.
- the overhaul of the foreign exchange rules, meaning that outward transfers under employee share plans are now being made under the Liberalised Remittance Scheme (LRS), to which TCS applies.
The planned changes had created much uncertainty and frustration for companies operating incentive plans involving outward remittances, such as purchase or matching plans.
On 28 June, however, the Indian Ministry of Finance issued a press release with some last-minute helpful changes to the updated regime, likely following concerns from local businesses and residents.
- Restoring an annual threshold: restoring the original annual threshold of Rs. 7 Lakh (the equivalent of INR700,000) per financial year, per individual – meaning that, for any overseas remittances up to Rs. 7 Lakh (INR700,000) per individual, per year, there will be no TCS charge; and
- Delaying implementation: for any individual that exceeds this threshold, the 20% TCS will not take effect until 1 October 2023.
This is a very welcome (last minute!) revision to the 2023 Indian Budget announcement, so it is great to see the Government responding to the local concerns over this increase.
Whilst historically, TCS would not necessarily be relevant for share plans (as employee share plan remittances did not necessarily fall under the LRS regime), companies will now (despite the good news changes) still need to consider whether participants will exceed this annual threshold and, if so, whether there will be any local obligations to withhold the 20% charge. Though note that, for many, this threshold may never be met by participants under contributory plans.
We have seen that some companies and local banks have been taking different interpretations of the applicability of TCS to employee share plans. It is therefore recommended that companies engage with their local teams on these requirements to discuss their approach.
We will keep you updated on any further amendments!
Sally Blanchflower, Emilie Sylvester & Lewis Dulley