Fintechs meet finance ministry officials to flag 20% levy on remittances under LRS

Founders and senior executives of new-age stock investing platforms such as IndMoney, Vested Finance, and Stockal met officials in the finance ministry on Monday to discuss the possible implications of a proposed 20% levy on foreign remittances under the Liberalised Remittance Scheme (LRS) for retail investors investing in US equity instruments, two people aware of the discussions told ET.

The stakeholders explained the impact of the levy on retail investors, the sources said.

Finance minister Nirmala Sitharaman proposed in the budget to raise the tax collected at source (TCS) to 20% from 5% earlier, and remove the Rs 7 lakh limit below which TCS was previously not applicable on foreign remittances.

This has directly affected fintech firms that offer US-equity investments.

They believe the proposed increase in TCS on such transactions will hurt retail investors and curb the growth of the industry.

“They acknowledged our stance and said that they will relook at the concerns, and come back with what best can be done, after their meeting later this month. They also said that the slab-wise approach (of charging TCS) also made sense,” one of the sources briefed on the matter said.

Executives of at least five fintech firms were present during the meeting, the person added. Last month, these firms had written to the Central Board of Direct Taxes (CBDT) on the proposed levy.

They sought a slab-based structure, proposing that the 20% TCS provision be retained only for foreign remittances of Rs 7 lakh and above, per individual annually.

Below the threshold, no TCS should be levied on customers, these firms said in the letter.

This is to separate high-net worth individuals (HNIs) and protect the middle-income retail investors who on average invest less than Rs 15,000 per remittance in US equities through LRS transactions.

In the letter, sent by industry body Internet and Mobile Association of India, the fintech firms also provided a detailed explanation about the demographic of investors investing in US-equities through these platforms, sources briefed ET on the contents of the note said.

IndiaTech, an industry body whose members also include neo-banking and investment platforms such as Moneyhop and IndMoney, has also written to the government on the issue.

According to one of the written representations, seen by ET, the industry has said that for these investors, annual remittance value per individual is less than Rs 1 lakh, with almost two of every three investors being salaried individuals and already subject to withholding taxes.

Further, 71% of investors in foreign-listed equities fall under an annual income bracket of up to Rs 10 lakh, the industry has argued.

ET was the first to report on February 17 that fintech firms that allow users to invest in US-equities were planning to write to the CBDT on the adverse impact.

Neo-banking platforms such as Fi which are actively looking at this use-case of US-stock investing have also joined the representation.

“The recommendation from the industry to the government is to introduce a slab-based structure by bringing back the Rs 7 lakh annual threshold, over which a 20% TCS can be charged to individuals. It has been optimised to ensure the least friction required from the government for changing the proposed TCS regime, while finding a middle ground between the industry,” said one of the people who is part of the consultation process.

IndMoney, Vested Finance and Stockal did not respond to ET’s queries until press time Monday.

Implications

As part of its representation to the government, the industry has argued that the foreign equity investment use case helps provide wealth creation and diversification to Indians as well as widens the tax base from appreciation of capital investments.

“The written representation also states that the industry combined has put across 1 million investment accounts, which is a sizable number and expected to grow. The new proposed TCS regime impacts that,” said a third source who is aware of the contents of the letter.

ET has reported previously that these firms were looking to explain to the government that investment in foreign equities is a closed loop system, where gains come back to an Indian bank account.

Further, in their recommendations, these firms also said that an increase in TCS will block cash and leave less disposable income to invest in foreign equities.

According to the latest RBI data, total outward remittances under LRS stood at $19.6 billion in 2021. Of this, investment transactions in foreign equity and debt were $746.5 million, or 3.8% of the overall foreign remittances under LRS.