Introduction:
In recent times, there has been a lot of discussion, especially on social media, about the levy of a 20% Tax Collection at Source (TCS) on the usage of international credit cards. It is important to analyse this issue in detail to separate the facts from the hype. Let's delve into the relevant provisions and understand the situation more comprehensively.
Background:
The Liberalised Remittance Scheme, introduced by the RBI, enables resident individuals to remit money abroad for personal purposes without requiring prior approval. The scheme allows remittances up to USD 250,000 per financial year.
Section 206C(1G) of the Act provides for collection of TCS on remittance of the amount under the Liberalized Remittance Scheme (Commonly referred to as the 'LRS') of the Reserve Bank of India (Common referred to as the 'RBI') and on sale of overseas tour program package.
Vide Finance Act, 2023, the rate of TCS for the specified remittances under LRS and overseas tour program package was revised at 20% effective from 1st July, 2023 from erstwhile 5% which is applicable till 30th June, 2023.
Certain relaxation by Ministry of Finance vide press release dated 28-06-2023 and CBDT circular 10 dated 10-06-2023
In order to ease the practical difficulties that may arise from the removal of the threshold for LRS payments, Ministry of finance vide press release dated 28-06-2023 has further revised the rates of TCS as mentioned below and it has postponed the implementation of this amendment to 01st October 2023. Therefore, the increase in TCS rate, which were to come into effect from 1st July 2023 shall now come into effect from 1st October 2023 with the modification in the rates of TCS as mentioned below. Till 30th September, earlier rates (prior to amendment by the Finance Act 2023) shall continue to apply.
Threshold of Rs. 7 Iakh per financial year per individual in clause (i) of sub-section (1G) of Section 206C shall be restored for TCS on all categories of LRS payments, through all modes of payment, regardless of the purpose: Thus, for first Rs 7 lakh remittance under LRS there shall be no TCS. Beyond this Rs 7 lakh threshold, TCS shall be at the rate of
For purchase of overseas tour program package under clause (ii) of sub-section (1G) of section 206C, the TCS shall continue to apply at the rate of 5% for the first Rs 7 lakh per individual per annum, the 20% rate will only apply for expenditure above this limit.
Thereby, the effective rates of TCS will be as follows:
| TCS rate till 30.09.2023 | TCS rate with effect from 01.10.2023 | |||
|---|---|---|---|---|
| Exemption limit | Rate | Exemption limit | Rate | |
| LRS – Remittance for education abroad If the amount being remitted out is a loan obtained from any approved financial institution. | 7 lakhs | 0.5% | 7 lakhs | 0.5% |
| LRS - Remittance for Education abroad if the remittance is out of own funds and not out of loans as mentioned in (a) above | 7 lakhs | 5% | 7 lakhs | 5% |
| LRS - Remittance for medical treatment | 7 lakhs | 5% | 7 lakhs | 5% |
| LRS - Any other remittance such as gift, emigration, family maintenance, investments etc | 7 lakhs | 5% | 7 lakhs | 20% |
| Purchase of overseas tour program package | NIL | 5% | NIL | 5% till Rs. 7
lakhs. 20% Above Rs. 7 lakhs. |
It is evident from the table that, effective from October 1, 2023, there will be a change in the TCS rate to 20% from the current 5% for the sale of overseas tour program packages and remittances under LRS, except for medical and education loan purposes.
Is TCS under LRS applicable to Non-residents?
The LRS applies to resident Individuals. The remittance rules for NRIs for remittance of funds from NRE, NRO and FCNR accounts are not covered by LRS. Therefore, TCS is not applicable for remittance made by non-residents.
Is TCS applicable for purchase of foreign currency or forex pre-paid cards?
Yes, Tax Collected at Source (TCS) is applicable for the purchase of foreign currency or forex pre-paid cards under the Liberalized Remittance Scheme (LRS). When purchasing foreign currency or forex pre-paid cards under the LRS, authorized dealers or banks will collect TCS at the rate of 20%.
Understanding the LRS and International Credit Card Usage:
The recent buzz surrounding the imposition of a 20% Tax Collection at Source (TCS) on international credit card usage has caused confusion.
When traveling abroad, a person could use international debit cards, international credit cards or other methods for undertaking the various transactions (for easy understanding, consider it as the LRS transactions at present).
Previously, Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000 exempted usage of international credit card for expenses incurred while on travel abroad, from LRS limit. Due to the exemption under the erstwhile rules, expenditures through credit cards were not accounted for the specified LRS limit which led to some individuals exceeding the LRS limit. So, one can say that differential treatment was given for 'International Credit Card' as compared to the 'International Debit Card' which should not be ideally the case without any specific reason.
However, a recent notification on May 16, 2023, removed the LRS exemption given to the use of international credit cards for meeting his expenses when he is abroad. Consequently, payments made through both international debit cards and international credit cards are now. treated equally. This removal of the exemption has sparked speculation that a 20% TCS will be imposed on international credit card usage.
Ministry of Finance vide press release dated 28-06-02023 offers relief by exempting TCS on International Card Transactions:
To ease procedural ambiguity and to give adequate time to Banks and Card networks to put in place requisite lT based solutions, the Government has decided to postpone the implementation of its 16th May 2023 e-gazette notification. This would mean that transaction through international credit cards while being overseas would not be counted as LRS and hence would not be subject to TCS. The press release dated 19th May 2023 stands superseded.
Is Credit of TCS available by filing Income Tax Returns?
Yes, the credit of TCS (Tax Collected at Source) is available to the payee under certain conditions. If the TCS payee is a taxpayer, they can claim credit for the TCS against their regular income and adjust it against their income tax liability while filing their income tax return.
However, if the TCS payee is not required to pay any income tax, the only option to claim a refund of TCS is by filing the Return of Income and claiming the TCS refund in that return. The interest on such refund will be calculated starting from the beginning of the next financial year until the grant of the refund.
There is threshold of Rs 7 lakh for remittance under LRS for TCS to become applicable while there is another threshold of Rs 7 lakh for purchase of overseas tour program package where reduced rate of 5% TGS applies. Whether these two thresholds apply independently?
Yes, these two thresholds apply independently. For LRS, the threshold of Rs 7 lakh applies to make TCS applicable. For purchase of overseas tour program package, the threshold of Rs 7 lakh applies to determine the applicable TCS rate as 5% or 20%.
Is the Rs. 7 Lakh Exemption Threshold Limit Qua the Remitter or Qua the Authorised Dealer?
The exemption threshold limit of Rs. 7 lakhs in respect of LRS remittances towards medical treatment and/or education abroad, is to be considered qua the resident individual (remitter) and not qua the Authorised Dealer. The aggregate LRS spends of resident individuals, in a financial year, are compiled and monitored by RBI, based on PANs of such individuals.
If a resident individual conducts LRS transactions through multiple authorized dealers/bankers or international debit/credit cards, the threshold exemption limit of Rs. 7 lakhs within a year will be calculated based on the collective amount spent across all authorized dealers/bankers. It is not assessed independently for each authorized dealer/banker.
Conclusion:
It is essential to dispel the confusion surrounding TCS on international credit card usage. Government Press release dated 28-06-2023 followed by CBDT Circular dated 30-06-2023 has made several changes to the provisions of TCS. Resultantly, transactions undertaken by Indian residents while travelling abroad using their international credit cards will not be counted as LRS and will not attract TCS. LRS facilitates such transactions in a seamless manner while also safeguarding the country's foreign exchange against instability. Residents and entrepreneurs alike should familiarise themselves with the nuances of LRS to have a hassle-free remittance experience and optimise their foreign exchange dealings.
CA Dhanush D Bolar, M.Com, ACA Partner
