Your overseas trips and shopping just got more expensive. The Government of India has amended the FEMA provisions to include all the international credit card spending in foreign currency under the Liberalised Remittance Scheme ('LRS'). An Indian resident is allowed to freely remit money out of India, up to a maximum of USD 2,50,000 (approximately INR 2 Crores) per financial year without the authorization of the Reserve Bank of India ('RBI') for purposes such as travel, education or medical treatment of self or family and for buying securities and physical assets. Hitherto, any purchases made by using an international credit card were not under the purview of LRS and hence were not restricted by the limit of USD 2,50,000 in a financial year. Debit cards were covered under LRS.
The Government vide a notification issued on May 16, 2023 has decided to bring the international credit card transactions as well under the ambit of LRS and with this now all foreign currency transactions done through any card viz., debit card, credit card and forex card, whether online or otherwise, are subject to an overall limit of USD 2,50,000 in a financial year (April to March). Remittances beyond USD 2,50,000 limit are subject to the approval of RBI. The transactions covered under the LRS are subject to tax collected at source ('TCS'), which means tax will be collected upfront at the time of making the payment itself. Forex cards are subject to TCS at the time of issuance irrespective of when they are used.
The rate of TCS was already increased from 5% to 20% in the Budget 2023-24, and will be effective from July 1, 2023. Hence, for all foreign currency transactions (except few specified ones) within the limit of USD 2,50,000, made using an international credit card will be subject to TCS at the rate of 20% from July 1, 2023. Even if the payments are made to travel agents in India in INR but ultimately are for overseas trips and hotel bookings, TCS will apply.
So going forward, where a person would use an international credit card for spending say USD 10,000 (for other than specified purposes), now there would be an extra burden of USD 2,000 in the form of TCS that will be collected by the bank. This TCS will be available as a credit and would be adjusted towards the quarterly advance tax or annual income tax liability payable by the card user.
This amendment casted a gloomy shadow on the travel plans of those who have international trips planned in the near future. A steep rate of 20% would mean a heavy cashflow and surely is a heavy financial burden on the overall budget for the planned holiday and shopping. Add to this, the extra bank charges and GST that will be charged by the bank for this extra USD 2,000. After the feedback from various quarters, with a view to provide relief and to soften the blow, the Government on Friday last week issued a clarification that TCS will apply to spending incurred above INR 7 Lakhs. Thus, spendings above INR 7 Lakhs for say travel or hotel bookings or for making purchases in general will be subject to 20% TCS.
It is important to note here that some specified transactions, such as expenses up to INR 7 Lakhs incurred for medical purposes or education of self or family member are subject to a lower international rate of TCS at 5% (if expenses for education are incurred out of education loan taken, the TCS rate is 0.5%). These specified transactions will continue to enjoy the lower TCS rate exemption.
The Governments justification in bringing the international credit cards under the LRS is that while debit cards were monitored under the LRS with the ceiling of USD 2,50,000, the international credit cards were not monitored and hence the same were used for purposes other than the intended ones for which the Government allowed the facility. Hence, this move will help in tracking the high value spends by individuals in overseas territories. With the significant achievements that India has made in the fintech space and the fact that all international credit card transactions are already monitored and reported by banks to the RBI, this does not seem to be an agreeable reason.
The other logic, however, seems more palatable. As per the RBI data released in April 2023, in just two months of January and February 2023, Indians have remitted USD 4.82 billion under the LRS, out of which a whopping USD 2.56 billion was for travel and 20% of this could give the Government close to USD 512 million. Consider this on a full year basis going forward and the bonanza that the Government would be having by collecting 20% as TCS. Even though a part of the tax so collected in advance, would be either adjusted by people in their tax payments or would be claimed back as refund in their tax returns, the Government clearly will have the timing advantage on its side. The Prime Minister in 2020 said in the Parliament that more than 3 crore people went for international travel, but only 1.5 crores paid income tax. Guess what! The Government has found a solution and you just got taxed. Now the wait starts for the end of the year and for the refund to get processed.
Originally published by Taxsutra.
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