As the holiday season beckons, many Indians are eagerly preparing for their trips abroad. However, an amendment to the Foreign Exchange Management (CAT) Rules, 2000, may put a damper on their travel budgets, especially for those relying on credit cards for overseas expenses.
Under the revised regulations, all international transactions made by individuals using credit cards outside India now fall under the purview of the Reserve Bank of India’s Liberalised Remittance Scheme (LRS). The LRS permits Indian residents to send up to $250,000 abroad in a financial year without seeking prior approval from the central bank. This amendment took effect on May 16, 2023, as announced by the Ministry of Finance in the Gazette of India.
Additionally, any overseas spend exceeding Rs 7 lakh will be subject to a 5 percent tax collected at source (TCS). This rate is applicable until June 30, 2023, after which credit card transactions will attract a higher TCS rate of 20 percent starting from July 1, 2023. However, the Ministry of Finance clarified in a recent release that international spends up to Rs 7 lakh made by individuals using credit cards or debit cards will remain exempt from TCS even after June 30, 2023.
Furthermore, for those purchasing overseas tour packages, the current TCS rate of 5 percent will be increased to 20 percent starting July 1, 2023. Gautum Nayak, Partner at CNK & Associates LLP, emphasised that the TCS applies irrespective of whether the payment for the tour package is made in Indian rupees or any other currency.
With these new regulations in place, Indian travellers are advised to review their travel budgets and consider the potential impact on their credit card expenses while enjoying their holiday abroad.
As the holiday season approaches, travellers planning trips through Indian travel agencies may face additional expenses due to the implementation of Tax Collected at Source (TCS). According to Sumanta Mandal, founder of TechnoFino, if you book your holiday through an Indian travel agency, they will bear the TCS burden on your behalf. However, the agency will pass on this cost to the customer by including it in the travel bill. Your PAN (Permanent Account Number) will be mentioned during the booking process, allowing you to claim TCS credit when filing your tax returns.
This means that individuals planning summer vacations to destinations like Europe will need to adjust their travel budgets. Although it is possible to obtain a refund for the TCS amount when filing tax returns, travellers will initially need to bear higher upfront costs.
Regarding international transactions made using credit cards while in India, Gautam Nayak clarifies that these transactions are already covered under the Liberalised Remittance Scheme (LRS).
Brace up for higher upfront international travel costs.
Starting July 1, 2023, a recent amendment requires individuals to allocate an additional 20% of their planned foreign remittance amount for expenses such as travel and shopping abroad.
Unlike tax deducted at source (TDS), which is imposed on income sources like salary and interest income, tax collected at source (TCS) is deducted on specific expenses to enable the tax authority to track them. The TCS amount can only be claimed when filing income tax returns, leaving the funds temporarily blocked until then.
Taking the example of international travel, Parijat Garg, a digital lending consultant, says, “Assuming a spend of Rs 1 lakh per passenger, for a typical family of 4, this may mean blocking nearly Rs 80,000 (Rs 20,000 per person) for 9–12 months. This would put more budgetary pressure on middle-class families aspiring to travel abroad for holidays.”
Credit cards in the LRS net to track spends
Tax consultants are expressing their concerns over the recent increase in the Tax Collected at Source (TCS) rate introduced in the Budget 2023. Many view the hike as a harsh measure, considering that individuals already pay taxes through Tax Deducted at Source (TDS) on various income sources. Neeraj Agarwala, Director at Nangia Andersen India, suggests that a lower TCS rate of 1 percent would have been sufficient for monitoring transactions, given the existing tax obligations.
The amendment to the Foreign Exchange Management Act (FEMA) rules has clarified that TCS will be levied on all international transactions made using credit cards, aligning them with transactions through debit cards, forex cards, bank transfers, and other channels. This clarification has resolved the confusion that arose after the passage of the Finance Bill 2023. Sumanta Mandal, Founder of TechnoFino, explains that including credit cards under the Liberalised Remittance Scheme (LRS) was necessary, as these cards are increasingly used for payments to merchants, international hotel bookings, and holidays.
Sudarshan Motwani, founder and CEO of BookMyForex.com, believes that the inclusion of credit cards in the LRS was long overdue, given their widespread usage in international transactions. The move aims to maintain control over foreign remittances while ensuring consistency across different payment methods.
How to claim TCS
To claim the Tax Collected at Source (TCS) credit, taxpayers must obtain a TCS certificate from the collector or deductor at the time of deduction. This certificate plays a crucial role during the income tax return filing process. When filing tax returns, provide the TCS details in the appropriate section of the tax form, including the TCS amount, certificate number, and other relevant information.
The TCS credit can be claimed against the taxpayer’s total tax liability, reducing the overall tax burden or potentially resulting in a refund if the TCS amount exceeds the tax liability.
It’s important to note that the deductor is responsible for issuing TCS certificates to taxpayers, which contain details of the TCS amount collected. Upon receiving the certificate, carefully verify the information to ensure its accuracy. Any discrepancies should be promptly resolved with the deductor. Rectifying such discrepancies may require additional effort, but it is crucial to claim the correct TCS credit.
To facilitate a smoother process when adjusting TCS while filing tax returns, maintain clear communication with the deductor, keep records of TCS certificates and relevant documents, and seek professional advice if necessary. Taking a proactive approach to resolving discrepancies or issues will help streamline the process and increase the likelihood of receiving a refund.
Regarding the operational process of charging TCS on credit card spends, there is still uncertainty. According to Gupta, the inclusion of cancellations, refunds, and cashback in forex transactions may potentially lead to tax-related disputes if not managed effectively with the use of technology. Agarwala highlights that the TCS may be reflected as an additional charge on the credit card statement for international spends, which are usually categorised separately from domestic credit card transactions.
Limited options to save on TCS expenses
According to Garg, the inclusion of all banking transactions, regardless of the payment method used (credit card, debit card, or others), under the Liberalised Remittance Scheme (LRS) means that individuals cannot escape the impact of Tax Collected at Source (TCS).
While the government aims to enhance tax compliance, some tax experts worry that the stringent rules and higher TCS rate may have unintended consequences. An anonymous expert highlights that the new regulations could potentially prompt individuals to find ways to bypass the rules. They may resort to asking their friends and family members residing abroad to make payments on their behalf, subsequently reimbursing them through transfers to their Indian bank accounts.
It remains to be seen how these concerns will be addressed and if any modifications or clarifications will be introduced to mitigate potential issues arising from the implementation of the new TCS regulations.