New Tax rule for Credit Card users: 20% TCS rule simplified
The holiday season has arrived, and according to the government's latest notification, individuals may need to save up some additional money to deal with the new "20% TCS" law. With effect from July 1, 2023, all international credit card purchases made outside of India will be subject to the Liberalised Remittance Scheme (LRS), which will also carry a higher TCS of 20%.
Beginning on July 1, a higher rate of tax collection at a source of 20% will apply to all purchases made using an overseas credit card. This is because a higher TCS fee will arise from the LRS's immediate application to credit card transactions made outside of India. Up until July 1, these transactions will be subject to a TCS of 5%, with the exception of those pertaining to the healthcare and educational sectors.
For example, When a user travels abroad, they use their credit card for all purchases—hotel, dining out, shopping, etc.—totalling Rs 5 lakh. This user has a credit card with a limit of up to Rs 5 lakh. The customer will now be required to pay 20% TCS, or 1,00,000, and your bank may impose GST on your credit card when you use it abroad. The bank that issues credit cards will now deposit 20% TCS against the user's PAN, and the user can only claim or adjust this amount when filing his income tax return.
The onus of collecting the TCS payment will be on the authorised dealer, i.e., the bank or financial institution which has issued the credit card. The bank would now collect an additional amount of 20% from July 1st, 2023 from the credit card holder to deposit the same as TCS. The TCS collected would be deposited in the credit card holder's PAN which can be adjusted against any income tax liability for that financial year. Though, while filing Income Tax Return (ITR), people can get back the TCS deducted in the form of Tax refund.
Experts Views:
According to many experts, the step of imposing 20% TCS is also aimed at increasing the central bank’s grip on foreign remittances, which sometimes, become a wobbly street to walk-on. It may also lead to more TCS cash flow and more people under the ambit of this tax along with compliance.
Former BharatPe MD Ashneer Grover slammed the new notification. Taking a jibe at the Indian government’s ‘interesting’ rule, Grover tweeted, “Foreign travel pe 20% TCS; foreign credit card spend pe 20% TCS and LRS limit me lana bahut hi interesting rule hai. Haan political donations pe kabhi TCS nahi lagne waala - yeh tay hai ! Wahaan aapko ulta income tax mein rebate milegi.”
Pranay Jhaveri, MD - India and South Asia, Euronet said, "The TCS revision will significantly impact overseas tour packages and increase the cash outflow immediately for travelers. The tour operator will have to collect 20% of the cost of the overseas tour package from the travellers, irrespective of the travel cost."
Jhaveri adds, "While the increased rate for foreign remittance tax in India makes overseas money transfers more expensive, the revision will bring accountability among taxpayers. That said, long term impact on the economy can be computed after the TCS revision comes into effect. The revision will add a compliance burden on banks and financial institutions. As far as taxpayers are concerned, the exemption is available, and the money deducted by the banks in taxes as TCS can be adjusted against the overall tax liability."
Another tax expert, Ajay Rotti, founder and CEO, Tax Compass, in his Twitter post said, “Dear @nsitharaman - TCS on international use of credit cards is not something you should go ahead with. It impacts a lot of business travelers who spend on behalf of the company. It serves no purpose with TCS on the employees name and it can't be on company name!”
Part A: Frequently Asked Question (FAQ) on 20% TCS rule
1. Why is TCS required to be collected?
Ans. Section 206C of the Income-Tax Act 1961 provides for TCS in the business of trading in alcohol, liquor, forest produce, scrap etc. Sub-section (1G) of the aforesaid section provides for TCS on foreign remittance through the Liberalised Remittance Scheme and on the sale of overseas tour packages.
2. Is TCS applicable to all remittances made abroad?
Ans. No. Only such remittances which are covered under LRS are liable to TCS. These have been detailed in the answer to Q (5) in Part B of the clarifications.
3. What is the reason behind the increase in rates of TCS?
Ans. The reasons for the amendment are:
The payment of TCS is not a final tax
If the TCS payee is a taxpayer, he can claim credit for the TCS as his tax payment against regular income and adjust it against the advance tax etc., payments accordingly.
If the TCS is of a person not being a taxpayer, then the 20% rate on such presumed income is not high. The tax rate slab of 20% starts in the new regime for incomes over Rs 12 lacs and is 30% for incomes over Rs 15 lacs.
No changes in medical or Education expenses- Position stays as it was before the Finance Act 2023.
Primary Impact only on investment in assets such as real estate, bonds, stocks outside India by HNI and tour travel packages or gifts to non-residents.
Those individuals remitting from their own funds are normally expected to be higher-income taxpayers, and for those remitting through institutional loans for education, a concessional rate of 0.5 % is provided.
4. What is the impact on travel and incidental expenses related to education and medical treatment?
Ans. For TCS on remittance for travel and incidental expenses related to education and medical treatment, the rates of TCS as applicable to remittances for education and medical treatment, respectively, shall apply. A detailed clarification will be issued separately.
Part B: Clarifications on the Liberalized Remittance Scheme
1. What is the notification dated 16th May 2023 amending the 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 and covered under Liberalized Remittance Scheme (LRS). The notification dated 16th May 2023 does not effect any changes in the use of international credit cards by residents while in India.
2. What is Rule 7 of FEM(CAT) Rules, 2000?
Rule 7 of the FEM(CAT) Rules, 2000 exempted the use of international credit cards from the LRS for payments by a person towards meeting expenses while such a person is on a visit outside India.
3. What was the need for the notification?
While on a visit abroad, a person could use international debit cards or other methods or international credit cards for undertaking current account transactions. Payments by debit cards etc. have been treated as LRS even earlier. Due to the exemption under erstwhile Rule 7, expenditures through credit cards were not accounted for under the specified LRS limit, which has led to some individuals exceeding the LRS limits. Data collected from top money remitters under LRS reveals that international credit cards are being issued with limits in excess of the present LRS limit of USD 2,50,000. The differential treatment between debit cards and credit cards needed to be removed in the interest of uniformity and equity in the treatment of modes of drawal of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits.
RBI had written to the government on more than one occasion, pointing to the need to remove this differential treatment.
4. What modes of expenditure of foreign exchange are covered under FEM(CAT) Rules, 2000?
It includes the drawal of foreign exchange from an authorised person and use of an International Credit Card. International Debit Card or ATM Card. All such drawals for the purposes specified in Schedule III (as explained in FAQ 3 above) are eligible for the limit of US$2,50,000.
5. What are the purposes under FEM (CAT) Rules, 2000, under which a resident individual can avail of a foreign exchange facility?
As per Rule 5 of the FEM (CAT) Rules, 2000, Individuals can avail of a foreign exchange facility for the following purposes, as detailed in Schedule III of the Rules. within the LRS limit of USD 2,50,000 on a financial year basis.
Prior approval of the Reserve Bank would be required for remittances exceeding the specified limits.
i. Private visits to any country (except Nepal and Bhutan)
ii. Gift or donation
iii. Going abroad for employment
iv. Emigration
v. Maintenance of close relatives abroad
vi. Travel for business, attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as an attendant to a patient going abroad for medical treatment/ check-up
vii. Expenses in connection with medical treatment abroad
viii. Studies abroad
viii. Any other current account transaction.
6. Does LRS cover business visits of employees?
No. 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.
7. What is Liberalised Remittance Scheme (LRS)?
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 current or capital account transaction or a combination of both. Further, resident individuals can avail of foreign exchange facility for the purposes mentioned in Para 1 of Schedule III of FEM (CAT) Rules 2000 within the limit of USD 2,50,000 only. The Scheme is not available to corporates, partnership firms, HUF, Trusts etc.
Under the LRS, in the financial year 2021-22, a total of USD 19.61 billion was remitted, rising from USD 12.68 billion in 2020-21. In 2022-23, it rose to more than USD 24.0 billion, of which overseas travel accounted for more than half.
8. What is a current account transaction?
As per FEMA Act, 1999, a “current account transaction” means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing, such transaction includes,
(i) payments due in connection with foreign trade, other current business, services, and short- term banking and credit facilities in the ordinary course of business,
(ii) payments due as interest on loans and as net income from investments,
(iii) remittances for living expenses of parents, spouse and children residing abroad, and (iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children.
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