An important issue that has been dominating domestic headlines over the last few weeks has been the recent Government announcement regarding imposing TCS or Tax Collected at Source on international credit card usage. Let us see what the furore was all about and how it could have impacted us.
What is TCS?
TCS or Tax Collected at Source has been introduced by the Government to improve tax compliance and also increase the tax base in the country.
TCS is a tax collected directly at the time of the transaction itself instead of relying on the taxpayer to pay it later. The person receiving the payment collects a percentage of the transaction amount as tax and submits it to the government. It is being levied on a whole range of Goods and Services to be collected at the point of sale.
The Government believes that imposing this TCS would help tune and reveal high-cost forex transactions and make certain that people pay their fair share of taxes. By levying the tax at the time of the transaction, it would discourage tax evasion and encourage compliance.
TCS on Foreign Remittances
Banks currently deduct a 5% TCS on all foreign remittances (other than for education and medical purposes). The Union Budget for 2023-24 hiked TCS rates to 20%, from the current 5% on overseas tour packages and any funds remitted under Liberalised Remittance Scheme (LRS). The purpose of this move is expected to help trace large-value international transactions.
Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible transaction. The Scheme was introduced on February 4, 2004, with an initial limit of USD 25,000. The LRS limit has been revised over the years to the current level.
New Update in the TCS rule
On May 16, the Finance Ministry notified the amended rules under the Foreign Exchange Management Act (FEMA), which has brought credit card spending outside India under the LRS. Earlier, the usage of international credit cards (ICCs) for making payments for fulfilling expenses during travel outside India was not included in the LRS limit. Only debit cards, forex cards, and bank transfers were included. So, spending in foreign exchange through international credit cards will be now covered under the RBI’s liberalised remittance scheme (LRS).
Technically, a TCS levy of 5% will come into effect on credit card transactions till July 1 (except for medical and education-linked sectors), which would then increase to 20% after July 1. This resulted in an uproar from the public and industry experts leading to the Government toning it down and later clarifying that payments using international debit or credit cards up to Rs 7 lakh per financial year will be excluded from the LRS limits and, therefore, will not attract any TCS.
It is essential for Indian travellers to factor in this additional financial obligation while making payments for overseas travel which may increase the overall expenditure for their trip. However, travellers can claim TCS credit while filing their tax return, which means that the net impact on their travel costs will not change.
When can taxpayers claim the TCS back?
While the exemption limit has been increased to Rs7 lakhs p.a, individuals who exceed this limit will see a higher bill on their cards, potentially blocking money for several months until a return is filed/refund is claimed and tax already collected is adjusted. Banks issuing credit cards will have set up processes for compliance and their burden will increase as a large number of Indians travel abroad and credit cards are commonly used for payments.
Taxpayers may now have to keep track of these TCS entries in their Form 26AS, some of them who spend on their employer’s behalf may be averse to bear the expense and may prefer to opt for other modes of payment, where there is no direct TCS implication for them.
One of the goals of the change is to make it easier to trace large-value international transactions, however, it has been made clear that the modifications will not apply to payments made for purchasing foreign goods or services from India, such as subscription services for newspapers, magazines, or online streaming services.
Other Important Announcements
The RBI has announced the withdrawal of the Rs 2000 note that was introduced in 2016 when the Rs 500 and Rs 1000 notes were demonetised. They felt the Rs 2000 note has become old and served its purpose. So, over the next 4 months up to 30th September 2023 public can go to any bank branch and get them exchanged but will remain legal tender and can continue to be used for any transactions.
To sum up
- On all foreign remittances and transactions (except for Medical and Educational) – TCS of 5% upto July 1st and 20% thereafter.
- On all credit card international transactions more than Rs 7 lakhs – TCS of 5% upto July 1st and 20% thereafter.
- Rs 2000 note to be withdrawn; can be exchanged at any bank upto 30th September 2023. Will continue to remain Legal Tender and can be continued to be used for any transactions.
Neeta
Well explained on detail
Usha
Thank you Neeta for your feedback. Do continue to follow us regularly.