Explained: What 20 per cent TCS on international credit card spends means

Earlier, only debit cards, forex cards and bank transfers came under LRS

On the Money NerdWallet Overdraft Fees

Earlier this week, Indians who frequently travel abroad were in for a shock after the finance ministry amended rules under the Foreign Exchange Management Act. Under the new rules, spending in foreign exchange through international credit cards would now come under the Reserve Bank's liberalised remittance scheme (LRS).

Earlier, only debit cards, forex cards and bank transfers came under LRS. Many people used their international credit cards to shop and make payments when travelling abroad. Many also use credit cards to pay for subscriptions to international magazines or streaming apps or buying products from foreign ecommerce platforms.

The RBI's LRS scheme has a limit of $250,000. Any international spends/remittances above that need approval from the central bank. The finance ministry stated that from July 1, even international credit card spends will now come under LRS.

The government had earlier in the Budget raised the TCS (tax collected at source) on expenses (excluding medical treatment and education) under LRS to 20 per cent from 5 per cent. The new notification omitted rule 7 of the FEM(CAT) rules, 2000, essentially removing the exemption given to the use of international credit cards for meeting expenses while abroad.

What it meant was come July 1, credit card usage abroad for example shopping, buying a coffee, paying for cab rides would now attract a 20 per cent TCS. So, if you were to travel abroad and spend, for instance, Rs 1 lakh through credit card, the total expenses will come to Rs 1.2 lakh, with the levy of 20 per cent TCS.

"This is big. By removing rule 7, this changes the game. Every international credit card transaction made by an individual will be under LRS limits. Means, 5 per cent TCS till July 1 and 20 per cent tax collected at source after that. (Can be adjusted against other taxes)," wrote Deepak Shenoy, founder and CEO of Capital Mind.

TCS is collected by the seller at the point of sale. In the case of credit card spends, it will be the bank that will have to put systems in place to collect the TCS. You could claim a TCS credit while filing income tax returns at the end of the financial year, but since it is levied up front, your immediate expenses would go up and will affect cash flows to that effect.

Not surprisingly, there was a lot of backlash. What if the person making international credit card spends was on an official company visit? Who would be liable?

"It impacts a lot of business travellers who spend on behalf of the company. It serves no purpose with TCS on the employees name and it can't be on the company name. TCS is being introduced for collection of data on transactions and not as a tax. Banks can be asked to share data on credit card transactions. TCS as proposed is not a good idea from the perspective of ease of business," wrote Ajay Rotti, founder and CEO of Tax Compaas.

Facing heat from various circles, the finance ministry issued a clarification on Friday stating there will be no TCS levied on international debit and credit card payments up to Rs 7 lakh.

"Concerns have been raised about the applicability of Tax Collection at Source (TCS) to small transactions under the Liberalized Remittance Scheme (LRS) from July 1, 2023. To avoid any procedural ambiguity, it has been decided that any payments by an individual using their international debit or credit cards upto Rs 7 lakh per financial year will be excluded from the LRS limits and hence, will not attract any TCS," said the statement by the finance ministry.

Existing beneficial TCS treatment for education and health payments will also continue, it said.

The government has separately released an explainer on TCS.

"TCS is a vital step towards a transparent and equitable payment landscape. From preventing money laundering to tracking overseas transactions, it paves the way for a stronger economy," the Twitter thread read.

The finance ministry also clarified that LRS doesn't cover business visits of employees.

"When an employee is being deputed by an entity and the expenses are borne by the latter, such expenses shall be treated as residual current account transactions outside LRS and may be permitted without any limit, subject to verifying the bonafide of the transaction," it said.

The government explainer also states that TCS will not be applicable on payments for purchase for foreign goods or services from India.

Tax experts say while excluding international credit and debit cards spends up to Rs 7 lakh out of LRS is a welcome move, frequent travellers could still find the limit to be very low. 


📣 The Week is now on Telegram. Click here to join our channel (@TheWeekmagazine) and stay updated with the latest headlines