Introduction
The Indian government has recently amended the rules under the Foreign Exchange Management Act (FEMA) for international credit card spending outside India under the Liberalised Remittance Scheme (LRS). This change has led to an increase in the Tax Collected at Source (TCS) rate to 20% on overseas credit card transactions, effective from July 1, 2023. This move has raised concerns among Indian travelers and the travel industry, as it is expected to impact the cost of travel and the compliance burden for banks and financial institutions.
New LRS Rules on 20% TCS and amendment under Section 206C (1G) of the Income Tax Act, 1961
Under the new LRS rules, international credit card transactions will be included in the annual LRS limit of $250,000 per individual. Previously, international credit card payments made during travel outside India were exempt from the LRS limit. The Union Budget 2023-24 increased the TCS rate from 5% to 20% on overseas tour packages and funds remitted under LRS, excluding education and medical purposes under Section 206C (1G) of the Income Tax Act, 1961. This change aims to create a level playing field between credit cards and debit cards and prevent individuals from breaching their annual LRS limit through excessive overseas credit card expenses.
TCS in case of Educational and Medical Remittances
In the case of educational and medical remittance, the rate of tax collected at source (TCS) remains at 5% for spends over INR 7 lakhs.
Key Points on 20% TCS regarding Foreign Remittance
- Remittances Up to INR 7 lakh: If the payments are made by an individual through their:
-
- International Debit or
- International Credit cards or
- Withdrawing cash or
- Engage in bank remittances (Indian account to overseas Bank A/c)
With up to Rs. 7 lakh per financial year will be excluded from the LRS limits. Therefore, this will not attract any TCS.
- Remittances above INR 7 lakhs: TCS is to be collected at the rate of 20% for the remittances that are above Rs.7 Lakh in a FY by Authorized Dealer – (*20% to be applicable from July 1st, 2023. Before that, 5% will be applicable.)
- Corporate credit card- When an employee is being deputed by an entity for any of the above, and the expenses are borne by the latter, such expenses shall be treated as residual current account transactions outside LRS and may be permitted by the AD without any limit, subject to verifying the bona fide of the transaction.
Omission of Rule 7 of FEM (CAT) Rules, 2000
The notification dated 16th May 2023 omits Rule 7 of the FEM(CAT) Rules, 2000. In effect, it removes the exemption given to the use of international credit cards for meeting his/her expenses by a person when he is abroad. Even earlier, all current account transactions undertaken on international credit cards in India were subject to Rule 5 of the FEM(CAT) Rules- (Prior Approval of RBI) and covered under Liberalized Remittance Scheme (LRS). The notification dated 16th May 2023 does not affect any changes in the use of international credit cards by residents while in India.
Compliance Burden for Banks and Financial Institutions
Experts have pointed out that the changes in credit card spending will likely add to the compliance burden of banks and financial institutions. If the move is intended to track overseas transactions, the TCS rate of 20% is probably too high and could have been instead at 1-2%. The measures for credit cards follow the government’s earlier steps to introduce a TCS levy for overseas tour packages.
Additional Implications of the New LRS Rules on 20% TCS
The new LRS rules and the 20% TCS on overseas credit card spending have far-reaching implications for various stakeholders, including travelers, the travel industry, banks, and financial institutions.
- Impact on Credit Card Usage and Consumer Behavior
The increased TCS rate may lead to a shift in consumer behavior, with travelers opting for alternative payment methods such as debit cards, prepaid Forex cards, or cash to avoid the high TCS rate on credit card transactions. This change could result in a decline in the usage of credit cards for overseas transactions, affecting the revenues of banks and credit card companies.
- Effect on Forex Market
The new rules may also impact the forex market, as travelers may prefer to buy foreign currency in cash or use prepaid forex cards to avoid the TCS levy. This shift in demand could lead to fluctuations in the forex market, affecting the exchange rates and the overall stability of the market.
- Challenges for Taxpayers
The increased TCS rate may create challenges for taxpayers, as they will need to track their overseas credit card transactions and claim TCS credit while filing their tax returns. This additional compliance burden may lead to errors and discrepancies in tax filings, resulting in penalties and interest charges for taxpayers.
- Impact on the Economy
The new LRS rules and the 20% TCS on overseas credit card spending may have a broader impact on the Indian economy. The increased upfront cost of travel and the potential decline in outbound travel could affect the tourism industry, which is a significant contributor to the country’s GDP. Moreover, the decline in credit card usage for overseas transactions may impact the revenues of banks and credit card companies, affecting their profitability and growth prospects.
Clarifications – Will LRS cover the visits of business employees?
If the employee is deputed by a business entity, and the expenses are borne by the business entity, then in such a case, such expenses shall be treated as residual current account transactions. This will be outside the LRS and may be permitted by the Authorized Dealer without any limit. Though, this is subject to verifying the veracity of the transaction.
Conclusion
The new LRS rules and the 20% TCS on overseas credit card spending have generated mixed reactions. While the government aims to create a level playing field and prevent individuals from breaching their annual LRS limit, the increased upfront cost of travel and the compliance burden on banks and financial institutions may have unintended consequences. As the new rules come into effect from July 1, 2023, it remains to be seen how the industry and travelers adapt to these changes and whether the government will consider revising the TCS rate or providing further clarifications to address the concerns raised.
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