Amid summer holidays that vacationers prefer to spend in cooler climes overseas, the government’s recent move to levy Tax Collected at Source (TCS) on international transactions using credit cards came as an unpleasant surprise.
The Ministry of Finance notified that such transactions would come under the Reserve Bank of India’s (RBI) Liberalised Remittance Scheme (LRS) with effect from May 16, 2023. And by virtue of that, these transactions are now subject to 5 percent TCS until June 30 and thereafter, at 20 percent.
Following much opposition, the government clarified that TCS would apply on international spending via debit or credit cards only beyond the threshold of Rs 7 lakh a year.
In this backdrop, we bring you this Q&A with Sandeep Jhunjhunwala, Partner at Nangia Andersen LLP, explaining what TCS is, what all transactions it applies to, and more. Edited excerpts:
What is TCS and why does the government levy it?
TCS is actually a tax on spending. It is collected from a buyer and has to be deposited by the seller to the income tax authorities. I'll give you an example.
If I buy any car of value exceeding Rs 10 lakh, then the car dealer will collect an additional tax from me on this spending. If the price of the car is Rs 50 lakh and there is 1 percent TCS on it, then the dealer will collect Rs 50,000 from me – Rs 50 lakh will go into his account as sale consideration of the car and Rs 50,000 will go to the tax department as TCS. The TCS will show in my Form 26AS (which shows details of TCS collected and TDS or Tax Deducted at Source for each year).
TCS is a tax on expense and TDS is a tax on income (such as salary and interest income). However, unlike TDS, TCS is never deducted and it is always over and above the base amount.
For example, if I have to pay you Rs 100, I will deduct TDS of Rs 10 and give you the remainder Rs 90. On the other hand, TCS is over and above the sale amount. The way TCS works is that as a buyer, I will add Rs 10 (TCS) to the Rs 100 that I have to give to the seller. That is, I pay Rs 110 – of this Rs 100 will go to the car dealer and Rs 10 to the tax department.
Traditionally TCS was supposed to be levied only on certain transactions (B2B or business to business), where the buyer and seller were defined in a certain way under the income tax law. So, for example, a business with gross receipts of more than Rs 10 crore in a year and engaged in activities such as selling scrap or selling alcoholic liquor for human consumption etc., was brought under the TCS net, whereby the government wanted to possibly collect tax by way of an additional levy.
But over a period of time, instead of being seen as a tax, TCS has also become a spend-tracking mechanism for the tax department. And I think that's what the government has intended to do with TCS on LRS and overseas tour package transactions. Having said that, I think a 20 percent rate for tracking transactions definitely seems extremely high.
Apart from the TCS on LRS transactions and purchase of overseas tour packages, are there any other transactions at a consumer level where TCS is levied?
The only other situation is purchase of a motor vehicle or a car, where the value of it exceeds Rs 10 lakh. In this case, 1 percent TCS applies.
Are there situations where a higher than the normally applicable rate of TCS may be levied on a transaction?
There are two situations under the Income Tax Act where a higher rate of TCS can apply. The first situation is where the person (buyer) has not filed his ITR (Income Tax Return) for two financial years and the total of his TCS and TDS liability in each of these two financial series was more than Rs 50,000. Then, double the TCS rate will apply.
So, as in the car buying example, the car dealership will apply TCS of 2 percent instead of 1 percent. Using the buyer’s PAN, the collector can identify if the buyer falls in this category by using the tax department utility.
The second situation is if the buyer doesn't have a PAN (Permanent Account Number). Then, again, double the TCS rate applies.
Also read: TDS, TCS aren’t money lost forever, you can adjust or claim it back
At the time of filing the ITR, one can adjust the TCS collected against one’s tax liability for the year. But if I have no tax dues to adjust the TCS against, then what happens?
If you are not liable for taxes, definitely the TCS will come back to you as a tax refund. The only catch is you will have to file an income tax return for this. You cannot get this refund if you are not filing your income tax return.
The other catch here is that you will lose on the time value of money because say, the TCS got collected in May or June of a particular year, whereas you file your return in July of the subsequent year and then possibly get a refund within another 2-3 months from thereon. So, you are losing interest on this amount for a certain period.
The rate of interest on refunds is 0.5 percent every month or part of the month and is applicable from April 1 of an assessment year till the date of grant of refund. However, this is applicable only when an individual files his/ her returns within the due date as notified by the tax department. In all other cases, interest on the refund is calculated for the period covering the date of furnishing the return till grant of refund.
Also read: Finmin's Rs 7-lakh relief to taxing foreign spends on credit cards can't resolve TCS crisis
Suppose the TCS collector (car dealer or tour operator, for example) fails to collect TCS or does not pass the TCS collected to the tax department. Will the buyer get into trouble for this?
In both these situations, the person collecting the TCS would be considered as the defaulter because the buyer has discharged his liabilities to the TCS collector. In both cases, the TCS collector will be liable for interest (1 percent per month) and in the second case where TCS was collected and not remitted to the tax department, the person could be liable for penalty too. There could also be prosecution against the person who has not deposited the TCS money to the tax department.
I have paid TCS during the year but it still does not reflect in Form 26AS. What’s the way out?
This could happen if the TCS collector took the TCS from the buyer, but did not file TCS returns. In that case, the only recourse available is to go back to the TCS collector (the car dealer, for example) and ask him to file TCS returns so that it reflects in your Form 26AS. Without this, you will not be able to adjust the TCS or claim refund for it, as it does not reflect in Form 26AS.
You can raise your grievance on the income tax portal but that may not help.
Also read: Leave encashment up to Rs 25 lakh to be tax-free for non-government workers
