TCS on foreign spend: Tour operators hail extension but sceptical over tax collection

The government is also looking to curb the excess spending people are engaging in while travelling abroad.

With the finance ministry delaying the implementation of higher Tax Collected at Source (TCS) on overseas spending to October 1, the tour operators have welcomed the decision saying it will give time to banks to develop the system. However, they added by stating that they do not have the bandwidth or resources to implement it.

“We welcome this as this benefits all the stakeholders, the financial system shall have the time to work out the system for implementation of the tax. Individuals, tour operators and even the government would benefit by the exemption of Rs 7 lakh being offered to all categories. For tour operators  this is a major relief as TCS at the rate of 20 percent would have been ruinous for them. They would have gone out of business. Hopefully the banking system will be able to develop the system by October 1,” Rajiv Mehra, President, Indian Association of Tour Operators (IATO), told Moneycontrol.

The government has clarified that international credit and debit card spends on foreign travel up to Rs 7 lakh will be excluded from the Liberated Remittance Scheme (LRS) limits and therefore won't attract TCS.

Burden of collection

However, it has also decided to increase TCS on international holiday packages to 20% for expenses beyond Rs 7 lakh, a significant increase from the current 5%. The basic purpose of the government  was to bring more people into the tax net. The government is also looking to curb the excess spending people are engaging in while travelling abroad.

“The new taxation regime would put the onus of collection of tax on the tour operators for which tour operators neither have the bandwidth nor the resources required for implementing it. This would make things onerous and complex for tour operators,” he said.

In fact, IATO’s long standing demand is to bring TCS down to 2.5 percent, which Mehra said the association would continue to push for.

“The extension of the implementation of the new rule mandating a 20% TCS on overseas tours is viewed positively by travel industry bodies and companies. They see it as a relief, as the proper mechanisms for implementing these rules aren't yet in place. Banks and credit card companies are currently struggling to calculate the TCS component because the reporting systems are unprepared. We believe that the government needs to establish best practices and procedures, and not leave loose ends hanging. The extension has been requested to allow for these improvements and for the industry to prepare for the changes,” Jyoti Mayal , Vice Chairperson, Federation of Associations in Indian Tourism & Hospitality (FAITH), told Moneycontrol.

We have stated the need for the government to organise the systems and bring parity. The burden this places on travel agents, tour operators, and banks, who are deemed ill

-prepared for this change, is also a significant concern. Therefore, while the extension is a step in the right direction, there are further demands and changes that industry representatives hope to see.

The finance ministry statement said that the industry, including banks and travel agents, need time to understand the implications of these changes and to modify existing agreements and employee policies accordingly. The aim is to go for a seamless transition to ensure that all parties are prepared for the upcoming changes.

“We have strongly expressed concern about implementing the new TCS rules without a proper mechanism in place. Industry representatives want the Rs 7 lakh TCS threshold limit to apply to all travel services and payment modes to ensure parity between domestic and overseas travel agents,” Mayal said.

Despite the extension of TCS implementation date, there are ongoing concerns and demands. Industry bodies and companies are seeking further clarification on the new rules and their implementation. They're seeking that the Rs 7 lakh TCS threshold limit apply to all travel services and payment modes.

“We have stated the need for the government to organise the systems and bring parity. The burden this places on travel agents, tour operators, and banks, who are deemed ill-prepared for this change, is also a significant concern. Therefore, while the extension is a step in the right direction, there are further demands and changes that industry representatives hope to see,” she said.

Banks and card companies would get time to build IT solutions required to implement this tax. However this should be fully withdrawn as the cost of compliance would far outweigh the tax collected, according to Ajay Prakash, Board Member, FAITH.

“Banks and card companies may get ready by this time but I doubt whether the tour operators can build a system to collect this tax. This is simply beyond their capacity and simply not their work. There needs to be reconsideration on this aspect,” he told Moneycontrol.

As per the latest clarification from the finance ministry, if a person is overseas and spends through the credit card, it would not count under LRS and therefore would not attract TCS even after October 1. Further, if a person uses credit card while in India for permissible overseas transactions, then that would count under LRS and attract TCS if it exceeds Rs 7 lakh in a year.

“There are too many lacunas as it means you can spend from international credit card without being subjected to TCS. This gap needs to be plugged. Extension is just a small relief. The burden of compliance remains on tour operators and it would be a very complex and costly exercise for the tour operators to act as tax collectors. This needs to be reconsidered,” he said.