Starting July 1, 2023 the tax collected at source (TCS) rate for foreign remittances has been raised from 5 per cent to 20 per cent.
As a result credit card users will have to shell out more to book foreign tour packages.
The Ministry of Finance has recently asked the RBI to bring credit card payments during foreign tours under the Liberalised Remittance Scheme (LRS) to ensure that such expenses do not escape tax collected at source.
Foreign credit card transactions will attract TCS at the rate of 20% from July 1, up from 5% currently.
“20% TCS” has been trending on Twitter after the Centre notified the amended rules under the Foreign Exchange Management Act (FEMA).
This notification brought international credit card (ICC) spending under the RBI’s liberalised remittance scheme (LRS).
What this essentially means is that 20% tax will be levied on all such transactions from July 1, 2023.
Exemption
20% TCS will not be applicable in the healthcare and education sector.
If you avail overseas tour packages from an Indian tour operator, 20% TCS will not be applicable.
Removing rule 7
By removing rule 7 every international credit card transaction, from today, made by an individual will come under .LRS limits.
Hence it will be TCS till July 1. And 20% Tax collected at source after that. (Can be adjusted against other taxes)
This also means that if an individual wishes to spend more than $250,000, they would need prior approval from RBI.
Background
LRS was introduced by RBI in 2004 to allow Indian residents to remit up to $250,000 per financial year (April-March) without prior permission from the apex bank.
What has changed is that earlier, international credit card swipes were exempt from TCS since they were not included in the LRS limit.
Reason for bringing credit card payments for foreign travel under LRS
Finance Minister Nirmala Sitharaman said, “It has been represented that payments for foreign tours through a credit card are not being captured under the Liberalised Remittance Scheme (LRS) and such payments escape tax collection at source (TCS).”
“The RBI is being requested to look into this to bring credit card payments for foreign tours within the ambit of LRS and tax collection at source thereon,” she added.
Expert view
The new rule has been met with mixed reactions.
Some were for the move, saying that it will help to curb black money and improve tax compliance.
Criticism rained in saying that it will make travelling and shopping abroad more expensive for Indians.
Shardul Amarchand Mangaldas & Co Partner Yogesh Chande said deletion of Rule 7 with effect from May 16, 2023, will tighten the usage of international credit cards for making payments by a person towards meeting expenses while such person is on a visit outside India.
He said it will also allow RBI to monitor the usage of credit cards for the purposes of foreign travel more closely.
Grant Thornton Bharat Partner Riaz Thingna said the notification essentially means that credit card spends outside India will also get roped within the ambit of the overall cap of USD 2,50,000.
“This is irrespective of the fact that whether such spends are for personal or business purposes and there is a consequential TCS impact,” Thingna added.
How does it work? An example
For instance, you want to book a family tour package to Thailand that costs Rs 2 lakh
If you use your credit card to purchase the package, you will have to spend an additional Rs 40,000.
Do note that all other payment methods are already under LRS and this TCS of Rs 40,000 will be applicable there as well.
Other payment methods include transferring money from one bank account to another or payments through debit cards.
Benefits
The 20% TCS is expected to raise an additional Rs 10,000 crore for the government.
The government had said that the tax will be used to fund social welfare programmes and infrastructure development.
Taxpayers will be able to claim the 20% TCS back as a credit against their income tax liability.
TCS can be claimed in the Income Tax Return (ITR) filed for the financial year in which the remittance was made. The TCS certificate issued by the bank will be required to claim the credit.
Credit card payments under LRS: What users must do now
Do remember that TCS is not a tax by itself.
It is adjustable against a taxpayer’s total income tax liability in a financial year.
An upfront TCS of 20 per cent on tour packages will increase the cash outflow.
If the user does not have an adequate tax liability to offset the TCS, he or she will have to file for a refund which could take several months, thus severely impacting his or her cash flow, said Agarwala.
So, while making a budget for your next foreign trip, you must factor in this condition, experts advised.
Forex cards to also attract TCS
Do note that from October 1, 2020, international transactions through debit cards (including dynamic currency conversion transactions) and load/reload transactions on foreign travel cards by banks have been brought under the purview of LRS.
So, if you use your forex card for booking foreign tours, it will also attract a TCS of 20 per cent.
How will the 20% TCS be collected?
The 20% TCS will be collected by the bank or financial institution that issues the international credit card.
For example, if a credit card holder spends $10,000 abroad, the bank would collect $2,000 as TCS and deposit it with the government.
The TCS collected would be deposited in the credit card holder’s Permanent Account Number (PAN) which can be adjusted against any income tax liability for that financial year.
The TCS can be claimed in the Income Tax Return (ITR) filed for the financial year in which the remittance was made
The TCS certificate issued by the bank will be required to claim the credit
How will the 20% TCS be calculated?
It will be calculated on the amount of money that is spent using an international credit card outside of India.
For example, if you spend $100 on your credit card while you are on vacation in the United States, you will be charged a TCS of $20.
How will the 20% TCS be paid?
The 20% TCS will be paid by the cardholder to the bank or credit card company when they make the transaction.
The bank or credit card company will then remit the tax to the government.
Implications for the government
It is expected to generate additional revenue for the government because the government will collect the tax from the banks and credit card companies, and then use the tax revenue to fund government programs.
Implications for cardholders
It will increase the cost of using an international credit card since cardholders will have to pay the TCS in addition to the amount of money that they spend.
It also makes it more expensive for cardholders to travel abroad, as they will have to factor in the cost of the TCS when they are budgeting for their trip.
