Confusion persists on post-Oct 1 TCS regime

New Delhi: Confusion persists over the applicability of TCS (tax collected at source) up to 20% from October 1 on foreign remittances through international credit cards under the liberalised remittance scheme (LRS), two experts said, requesting anonymity, even as the finance ministry officials indicated on Thursday that credit card transactions conducted abroad while the user is in India (on international shopping sites, for instance) would attract the levy.

At present, individuals making transactions through international credit cards while overseas will not attract TCS, the officials said.

“Transactions through international credit cards, while being overseas, would not be counted as LRS and hence would not be subject to TCS,” one of them said.

However, there are some technical nuances that need to be resolved before implementing the new LRS rules, which is why the government on Wednesday pushed the July 1 deadline to October 1, the officials added.

The applicable TCS rates on credit cards will be zero up to an expenditure of ₹7 lakh, beyond which it would attract 20%, the second official said. “The key difference here is only in the case of payments for overseas tour programmes. Such payments, by any mode, will attract 5% TCS till ₹7 lakh and 20% over ₹7 lakh,” the official added.

It is, however, not immediately clear whether the transactions carried out while abroad will be brought under the TCS net in future. “Expenditure through credit cards while overseas is not included in LRS as on date and will continue till a further decision on the matter. No date has been specified for this,” the second official said.

One of the experts mentioned above said the government would have to seek approval of Parliament before enacting the new TCS rates. “Probably, most of the confusion will be cleared when the matter comes to Parliament in the coming Monsoon session,” he said.

Experts criticised the move as multiple tax rates would make the system complicated and lead to a compliance nightmare. They also pointed out that the move is also a roundabout way of reducing the overall LRS limit of $250,000 a year.

HT on May 20 wrote that the government’s move effectively reduced the LRS limit. “If the idea is to reduce the amount Indians can spend or invest overseas in a year, or use to buy assets such as houses or stocks, then it is anti-reformist, and goes against the original reasons why LRS was introduced. If the idea is to crack down on untaxed income finding its way overseas — a cumbersome process given that even credit card spends are on the radar anyway — going after individual violators perhaps makes more sense than a sweeping rule change,” it pointed out.

Confusion also persists over deadlines for various types of transactions, a second expert said.

“Interestingly, the government has also decided to postpone its decision to bring payments made by international credit cards, while overseas, within the purview of LRS. However, no date has been specified for such inclusion so far. As of now, such payments will not be subject to TCS. Thus, there should be no TCS if Indians book their foreign travel (such as flights, hotels, etc) independently (using credit cards), rather than through tour packages,” said Kunal Savani, partner at Cyril Amarchand Mangaldas.

Shruti KP, partner at law firm Induslaw, said the government should reconsider the proposed rate of 20% above ₹7 lakh too.

“It puts unnecessary cash flow pressure on taxpayers, while not serving any additional purpose for the government, as far as garnering tax revenues is concerned since ultimately the TCS is available as credit to the taxpayer,” she said.

According to Russell Gaitonde, partner at consultancy firm Deloitte India, the press release issued by the ministry on Wednesday on the new TCS rule on foreign remittances that will now come into effect from October 1, instead of July 1, will provides banks more time to update their IT systems. “While one can continue to debate whether the increased TCS rate of 20% is very high, and ought to have been lowered, at least the government in yesterday’s press release has made it unequivocally clear that it is committed to increasing the TCS rate from 5% to 20%, therein indirectly signalling that it wishes to discourage the sizeable outflows that are being annually made overseas by Indian residents through the LRS route,” he said.

Amit Singhania, partner at Shardul Amarchand Mangaldas & Co, said, “It appears that usage of international credit cards while in India had always been considered and counted towards LRS. However, usage of international credit cards while outside of India was excluded from LRS. This distinction of usage in India or outside of India will continue till 30th September 2023 and w.e.f. 1st October, any usage of international credit card for drawal of foreign currency will be counted towards LRS.”