A new rule introduced by the finance ministry over the use of credit cards has created quite a storm, which introduces 20% TCS (Tax Collected at Source) over the use of credit cards for international purchases. This was done by including the foreign spending on credit cards in the RBI’s liberalised remittance scheme (LRS).
On 16 May, the ministry issued a gazette notification, which said that rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 has been omitted. Rule 7 of the FEMA (CAT) Rules, 2000 had said, “Nothing contained in rule 5 shall apply to the use of International Credit Card for making payment by a person towards meeting expenses while such person is on a visit outside India.” This means, under rule 7, the usage of international credit cards for making payments for fulfilling expenses during travel outside India was not included in the LRS limit earlier, but now they will be included in the same as the exemption granted to international credit card payments has been withdrawn.
Under the liberalised remittance scheme of the RBI, Indian residents are allowed to remit up to $250,000 per year without any prior approval from the RBI. Earlier, only debit cards, forex cards, and bank transfers were included in the LRS, and now credit card payments are also allowed under LRS.
But this has also meant that there will be a tax collected at source (TCS) on international credit card payments. The rate of TCS will be 20% from July 1, while the same will, be 5% from now till July 1. The TCS amount thus paid will be refunded by the government after the user files the tax return after the end of the financial year and is eligible for such returns.
While initially not known, the finance ministry also clarified later that the TCS will not be applicable to transactions. It will be applicable only if the expenses on a credit card in foreign countries cross ₹7 lakh in a year.
It is notable that Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) are different. TDS is deducted from earnings, like salary, interest and other payments received, while TCS is collected at the time of spending money to make purchases etc. However, the TCS is different from other taxes paid at the time of purchase, like GST and excise. For end consumers, GST and excise are essentially part of the price which can’t be reclaimed, while businesses can claim credit for GST. On the other hand, TCS is linked to an individual’s PAN and it can be claimed back while filing the income tax return, and therefore it is not a final tax payment.
Justifying the move, the finance minister has said that “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.”
According to the clarification issued, “data collected from top money emitters 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 drawl of foreign exchange and for capturing total expenditures under LRS for prudent foreign exchange management and to prevent by-passing of LRS limits.”
The ministry said that the RBI has written to the govt several times asking to remove the differential treatment of debit cards and credit cards.
The introduction of TCS on international credit card payments has created a lot of backlash on social media, across political circles. Just like many other decisions of the finance ministry, this decision is also being criticised by traditional BJP supporters on social media, apart from the opposition. Apart from criticism, many people also raised questions seeking clarification on the impact of this new rule.
The finance ministry issued a clarification on 17 May in an attempt to address the concerns raised by people. While it did address some concerns, some were left unanswered. Here is an attempt to break down the entire matter in simple terms, and address some concerns raised on social media.
What is the change
The abolition of rule 7 of the FEMA (CAT) Rules, 2000 means that credit card payments made while travelling abroad will attract 20% TCS. This means every international spent using a credit card will increase the outgo by 20%, a considerable increase in expense.
It is important to note that the TCS was already applicable if payment was made using debit cards or other methods, and only credit card payments were exempt. Now that exemption has been withdrawn.
However, as explained above, this is not a final tax payment, and it can be reclaimed, and the amount paid can be adjusted with overall income tax liability while filing the income tax return. Just like TDS, the TCS amounts paid by a taxpayer are also reflected in Form 26AS issued by the income tax department, and the same can be used in filing the ITR.
Yesterday the Finance Ministry amended the change, setting a threshold of ₹7 lakh in a year for the applicability of the TCS. Therefore, the TCS will be collected on international credit card uses only if the payment amount exceeds ₹7 lakh in a financial year.
The notification by the ministry said, “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.”
This comes as a big relief for people who do not spend much on credit cards during their travel abroad. The ₹7 lakh limit should cover most expenses by regular travellers, and if the flight and hotels are booked using Indian tour operators, the entire amount of ₹7 lakh could be used for other spends like shopping and entertainment without requiring to pay 20% tax.
Why it was needed
Several people have argued that credit card payments are already documented as they go through the networks of credit card companies and banking systems, and therefore there is no need to impose the TCS to trace high-value foreign transactions using credit card. Many people are also arguing that the govt’s justification of introducing the TCS to curb money laundering is wrong, as nobody uses credit card to launder money or for any illegal transactions.
While these are basically fair arguments, there some issues, as explained by finance ministry officials. According to data collected by RBI from top money remitters under the LRS has revealed that many people were using credit cards to make international remittances over the $2,50,000 limit. The Reserve Bank of India has been requesting the finance ministry to withdraw the exemption given to credit cards, and to bring them at par with debit cards and payment instruments.
Moreover, the difference between debit and credit cards in this regard was required to be removed to bring uniformity and equity between them. This was needed obtain the total expenditures made under LRS so that the foreign exchange management can be improved. The exemption for credit cards also provided a loophole to bypass the LRS limit, which needed to be plugged.
According to finance ministry sources that OpIndia talked to, several instances were discovered where disproportionately high payments under LRS were made compared to disclosed incomes. Analysis of the credit card spends abroad showed that several high-net-worth individuals were remitting amounts much more than the LRS limit of $2,50,000 (over ₹2 crore), by using credit cards issued in the names of different members of a family. For example, if a family has 5 credit cards, they were able to remit ₹10 crore in total, far exceeding the LRS limit.
The total remittance from India in the year 2021-22 was ₹19.61 billion under LRS, up from $12.68 billion, and it rose to e to 24 billion in 2022-23.
Why 20%
A very common question is being asked is that if the reason to bring credit cards under LRS was to trace high spends, what was the need to impose 20% tax, as the same purpose could be fulfilled by imposing a 1% tax also. This will lessen the impact on the individuals and will left more money in their hands to spend, it is being argued.
To this, the ministry has responded by saying that the rate of 20% is comparable to prevailing income tax rates. If the person using credit card abroad is not a taxpayer, then the 20% tax on the card spends abroad will not be very high for the presumed income of the individual. In the current income tax slabs, the income tax rate of 20% is applicable for taxable income above ₹12 lakh, and the same is 30% for taxable income above 30%.
Generally, only high-income individuals use the RBI’s Liberalised Remittance Scheme, and they fall in the highest slab of tax, which is 30%. The rate of 20% has been fixed considering these aspects. The TCS paid on international credit card spends can be treated as advance tax paid.
Honest taxpayers punished more?
A common argument against any new tax proposal is that they tend to punish honest taxpayers, leaving tax evaders out of the net. The same argument is also being made in this case.
To this, the ministry has said that the change to the rule is part of a larger policy-based approach to prevent bypassing the LRS limits using credit cards, and to trace individuals who are remitting high amounts of money using this method. Therefore, this rule is designed to catch those who are violating the rules of remittance.
The TCS on credit card spends abroad will mainly impact investments by HNIs in foreign countries, in instruments such as real estate, shares, bonds etc, and will not impact common people who use the cards in shopping and travelling. While there will be no TCS upto ₹7 lakh, any tax paid on spend beyond that limit can be claimed while filing the ITR.
It also does not limit the credit card use of individuals by bringing it under LRS, as the Liberalised Remittance Scheme (LRS) limit at over ₹2 crore per year is already quite high. It will not impact low and middle-income individuals; only upper-income earners will be most impacted by this limit on their credit card spending abroad.
The liquidity issue
Several people are arguing that even if one can reclaim the amount, it locks the amount for a considerable amount of time. If someone uses credit card to make international payment at the beginning of the financial year, the TCS amount gets locked for over a year, till the ITR is filed in the next FY, and the amount is credited by the department. It is being argued that it creates a liquidity problem as the cash gets stuck with the government.
It is true that any TCS collected will be refunded only after the financial year is over, which means it is true that the money will be stuck for a period ranging from a couple of months to over a year.
However, taxpayers can reduce their advance tax payments by the TCS amount so paid. Similarly, salaried taxpayers can get their TDS deduction reduced to that extent. As a result, the impact of the TCS collected can be neutralised.
Foreign visits paid by employer
A large number of foreign visits are business trips paid for by companies, and the TCS rule will not apply to the amount spent by the companies in such visits. This means, where a business pays the costs of air travel, hotel bills, and any other expenses using the company’s credit card, there will be no TCS on the same.
This is because international expenses made by businesses are treated as residual current account transactions outside the LRS limit. Companies may be allowed such payments without any limit, provided it is verified to be a bona fide transaction.
However, for any expense done using personal credit cards during such official foreign visits, such as shopping, eating, or any expense not paid by the employer, the TCS will be applicable, if the total spend exceeds ₹7 lakh.
The ministry will frame appropriate rules for remittance by corporate entities in due course of time. The ease of doing business principles will be kept in mind while making the rules, the ministry officials have assured.
What happens to subscriptions
A major concern among many is whether this TCS will be applicable to payments made to foreign entities for online purchases, such as streaming content, data services, web services and similar purchases. Many Indians subscribe to foreign streaming services, media houses etc.
Similarly, individuals and businesses pay foreign vendors for web hosting, domain services, cloud computing, productivity suits and many other online services, and many of them only accept credit cards. Individuals and businesses also purchase goods from outside India using credit cards. It is a concern among many that the TCS will have a negative impact on such businesses.
However, the finance ministry has clarified that the TCS will not be applicable to credit card payments made in India, even if they are paid to foreign entities. There will be no TCS on subscriptions or purchase of content, software, games or streaming services using credit cards. Similarly, there will be no TCS on goods ordered from foreign countries using credit cards.
It is also notable that many of the online service providers, like Amazon Web Services, Azure Cloud Services, Google Workplace etc now accept payments in Indian currency.
Medical & educational expenses
The finance ministry has clarified that the status quo prevails for medical and educational expenses made abroad, which means the 20% TCS will not be applicable to credit card payments abroad for medical and educational expenses.
However, a detailed guideline from the ministry in this regard is awaited, as it needs to be clarified how such expenses will be verified. It is expected that the people will have to be careful in making payments to healthcare or educational instructions abroad, as they will need to make sure that such institutions are recognised by the Income Tax Department so that the 20% tax is not collected.
How to avoid the 20% TCS
While the TCS will applicable to all uses of credit card during foreign travel if the use crosses ₹7 lakh, it can be avoided with a little planning. The TCS is applicable only if the payment is made outside India. Therefore, if the travellers book their flights and hotels using Indian tour operators such as MakeMyTrip, Agoda, Goibibo etc, and make payments using credit cards, there will be no TCS on such payments.
In conclusion, while new tax proposals are never popular, the govt has clarified that this was needed to curb the illegal remittance of money by misusing credit cards due to the exemption. However, with the ₹7 lakh threshold, this will not impact most travellers, and only a small number of HNIs who use credit cards to make large purchases and investments in foreign countries will be impacted.
