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Finmin's Rs 7-lakh relief to taxing foreign spends on credit cards can't resolve TCS crisis

International credit card spends are under LRS from May 16 and the 20 percent TCS will kick in from July 1, 2023. Until June 30, TCS at the rate of 5 percent will apply.

May 21, 2023 / 06:54 AM IST
Moneycontrol Twitter Spaces

Decoding the impact of 20 percent TCS on foreign spends, credit cards under LRS

The finance ministry may have, after widespread backlash, decided to exempt international spending of up to Rs 7 lakh from tax collected at source (TCS) of 20 percent, but the saga is far from over.

The swift move to introduce the Rs 7-lakh threshold is indicative of the heat generated by the decision to bring credit card spending under the ambit of Liberalised Remittance Scheme (LRS) so that 20 percent TCS could come into play. International credit card spends are under LRS from May 16 and the 20 percent TCS will kick in from July 1, 2023. Until June 30, TCS at the rate of 5 percent will apply.

Also read: How will tax on foreign tour spends on credit cards affect your holiday. The complete guide

Moneycontrol brought together top experts from credit cards, foreign exchange and tax domains to decode the chain of events and implications for individuals on its Twitter Spaces session on May 19.

Rohinton Sidhwa, Partner, Deloitte India, Kuldip Kumar, Partner, Mainstay Tax Advisors LLP, Sudarshan Motwani, Founder and CEO, and Sumanta Mandal, credit card expert and Founder, TechnoFino shared their views and answered queries around this contentious issue. Edited excerpts:

Why were only credit cards left out from the ambit of LRS so far? What was the rationale behind the change in status quo, which has brought credit cards under LRS, attracting TCS of 20 percent beyond spends of Rs 7 lakh in a financial year?
Rohinton Sidhwa: Credit cards have always been left out of the LRS limits. This can be traced back to a rule which was there in regard to our foreign exchange management rules. Essentially, credit cards were difficult to monitor. And they were traditionally left out; debit cards, on the other hand, were covered because debit cards are linked to the bank account. And any transaction from the bank account typically was easily monitored and covered by LRS.

But this distinction has been done away with by a notification from the Ministry of Finance bringing credit cards on par for LRS purposes (effective May 16). And one of the reasons that have been cited is that there was perhaps some sort of abuse of the $250,000 limit, which applied to bank accounts and debit cards but didn't apply to what was not monitored for credit cards. So the finance ministry tried to fix this loophole via this notification.

Also read: No levy on card payments up to Rs 7 lakh overseas, Finmin says after backlash on 20% tax rule

What are your views on the May 19 finance ministry notification that exempts debit and credit card international transactions of up to Rs 7 lakh a financial year from TCS?

Kuldip Kumar: This is good news. People who are going on holiday, meeting relatives etc will heave a sigh of relief now.

But is the TCS rate justifiable? A huge amount will now be blocked upfront and claiming credit or refund will be time-consuming…

Kuldip Kumar: The 20 percent rate is very high. Now, the government is using technology in return processing and otherwise, and they are providing prefilled data and return forms. All financial transactions are pretty much visible to the taxman. In that context 20 percent seems to be a little harsh, people should not have to first pay the taxes and then struggle to claim the refund by filing the returns.

Is there any way out for travellers wanting to minimise the TCS impact?

Sumanta Mandal: I would say just use a credit card here in India, collect rewards and use that for booking your hotel and flight. That's it. No other options, in my opinion.

Rohinton Sidhwa: I will say that (this is possible) only if someone has worked outside India and has an income earned from overseas and is keeping money in a resident foreign currency account. And if you make the payments from that account then these get excluded from the LRS then probably you can avoid the TCS on that. But anyway, this will be applicable only to select people or some business persons who have RFC accounts with the banks.

Can resident Indians try to avoid this TCS on credit card transactions by asking their relatives or friends living abroad to make payments on their behalf and then reimburse the amount? Would this be a legally tenable way of avoiding TCS?

Rohinton Sidhwa: The obligation of a resident being met by a non-resident is a permissible transaction under FEMA. But, I would hasten to add that that may not be something that can be done. Obviously, a relative can make a gift of foreign exchange to an Indian resident, so, that is certainly permissible. But, if the idea is to pay first and then reimburse later in some way or the other, then that is not permissible under the law.

In the case of prepaid forex cards, when is TCS deducted – when you buy the card, load it or when actually use it while travelling abroad?
Sudarshan Motwani: Be it foreign currency notes, Forex prepaid cards, or, for that matter, foreign international remittances, the TCS is collected upfront. You can buy a Forex card and you're allowed to keep around $2,000 with you, but then you have to pay the TCS from the entire amount, irrespective of whether you use it in one trip or in multiple trips.

What about subscriptions to publications such as Wall Street Journal, Bloomberg, Economist, and services such as iTunes and Spotify? Would those transactions, executed while sitting in India, also be affected now?

Sumanta Mandal: Yes, these will be affected. I mean, if you are making any transaction in USD (or any other foreign currency) then you have to pay 20 percent TCS if it breaches the Rs 7 lakh threshold that is now applicable. So, most users will escape TCS as the subscriptions will not cost more than Rs 7 lakh per year.

Rohinton Sidhwa: A lot of these subscriptions are actually paid in INR. And it's usually the companies who actually have a system with the RBI, they usually collect the money in INR and they themselves then remit it outside India. So the examples mentioned in the question… the companies would be collecting INR and not foreign exchange so they wouldn't be covered by the LRS in the first place.

Let's say you are travelling abroad via a domestic tour company and you are paying them in INR, but it's a foreign tour. So even those also would be under LRS and attract TCS?

Sudarshan Motwani: Just because you are paying in INR does not mean that it is not a foreign tour. It is LRS because eventually, the tour operator is paying in foreign currency.

Could you explain the process of claiming TCS credit and refund?
Rohinton Sidhwa: TCS shows up as a credit in your 26AS. And because it shows up as a credit in your 26AS, you can offset it against any tax payable, which is there, when you file your tax return, or when you pay advanced taxes. In case you're not able to offset this amount against taxes payable or any other form of TCS, then in that case, it is available as cash after you file your tax return and is determined as a refund.

What if I spend Rs 5 lakh each using different credit cards? I'm crossing the Rs 7 lakh threshold collectively, but on the individual card, I'm not crossing the Rs 7 lakh threshold...

Sudarshan Motwani: We had a Rs 7 lakh threshold for overseas remittances, for purchase of foreign currency bank notes and for forex travel card - each of these was being tracked by the individual service providers and that was the problem. Threshold has this problem.

So, today LRS is being monitored by the banks because there is a centralised server setup and the RBI, which actually track through the PAN card every amount of foreign exchange that is reported. So LRS right now is being tracked. But the banks still won't know if a bank has – if somebody's done a remittance beyond 7 lakh - somewhere only $250,000 limit is being monitored. This is what my knowledge is right now.

How can those who do not file returns, senior citizens over 75, for instance, claim TCS credit or refund?
Kuldip Kumar: Unfortunately, they will have to file the return to claim the refund. As of now, there doesn't seem to be any other mechanism. And I think the unfortunate part is that they will lose interest in that amount during the period until the refund is processed.

Preeti Kulkarni
Preeti Kulkarni is a financial journalist with over 13 years of experience. Based in Mumbai, she covers the personal finance beat for Moneycontrol. She focusses primarily on insurance, banking, taxation and financial planning
Maulik Madhu
Kayezad E Adajania
Kayezad E Adajania heads the personal finance bureau at Moneycontrol. He has been covering mutual funds and personal finance for the past two decades, having worked in Mint and Outlook Money magazine. Kayezad was the founding member of Mint’s personal finance team when it was set up in 2009.