How Will Budget 2023 Impact Investing in International Stocks?
Finance Minister, Ms. Niramala Sitharaman in the latest budget made an announcement that could impact investors who invest in international stocks under the LRS scheme. Before we get into the details of the information and its likely impact, let us first understand what an LRS scheme is.
What is the Liberalised Remittance Scheme (LRS)?
The Liberalised Remittance Scheme (LRS) is part of the Foreign Exchange Management Act (FEMA) 1999 which lays down the guidelines for outward remittance from India. With the help of the Liberalized Remittance Scheme (LRS), Indian citizens can freely send up to $250,000 (or its equivalent) abroad each fiscal year. Before the 2023 budget, Indians remitting funds abroad were paying only 5 percent as Tax Collection at Source (TCS (NS:)) on amounts in excess of Rs. 7 lakh. In high-value transactions where PAN was unavailable, 20% of TCS was only applicable.
What is TCS (Tax Collection at Source)?
According to the TCS concept, a person selling a certain item is required to collect tax from a customer at a set rate and deposit it with the government. TCS works similarly to TDS, the only difference being that TDS is deducted when you “receive” a payment while TCS is collected when you make a payment. Under the LRS scheme, TCS is collected in advance to ensure that those spending money abroad are filing returns in their home country.
Changes in Budget 2023:
Budget 2023 has imposed a new rule where an upfront tax of 20% will be collected at source for any investment or spending under the liberalized remittance scheme. Only remittances related to education and medical care are exempted from this.
The new law will be applicable to all investments, including stock purchases, international cryptocurrency transactions, art collections, and high-value purchases like real estate.
Even though TCS will be available as a tax credit when returns are filed, due to the huge percentage of taxes collected, this action will have a negative impact on individuals’ cash flows.
Investors will not be happy if 20% of their investment capital is stuck in TCS.
For example, if you had invested Rs. 10,00,000 lakhs in international stocks through the LRS route, earlier the TCS collected was Rs. 15,000 but now after the budget announcement TCS collected would be Rs. 2,00,000. This will be a big blow for investors and adversely affects investing platforms, especially aimed toward retail investors, that focus on direct investing in international stocks.
Alternate Investing Options
To diversify away from Indian investments and protect portfolios from country-specific risk, international investing is a necessary option. While investing in equities globally has grown more expensive, this policy change has no impact on mutual funds or ETFs that invest abroad because they are exempt from the LRS. Investors can therefore take such paths in order to continue to gain from global diversification.
Mutual Funds and ETFs investing in global stocks:
For mutual funds to invest in foreign securities and funds, the Securities and Exchange Board of India has established an overall industry maximum of USD 7 billion and a separate restriction of USD 1 billion for international ETFs. SEBI might place a temporary ban on investments when the investment limit is breached. Currently, Mutuals Funds have resumed investing in international stocks.
Examples of Mutual Funds Investing in global stocks:
Examples of ETFs focused on global indexes:
Global mutual funds or ETFs can offer exposure to a wider array of investment opportunities and can potentially provide higher returns due to the larger pool of investment options. Spreading investments across a broad range of global markets, industries, and currencies, can help reduce the impact of market fluctuations in any one specific market. As always, it is important to carefully consider the risks and potential rewards before making any investment decisions.
Disclaimer: Above piece is only for information purposes. Please consult a SEBI Registered Investment advisor before taking any investment decision.
