Deferment of higher TCS rate on overseas spending a judicious decision, experts say

The ministry said the deferment was made to give banks and card networks adequate time to put in place the requisite IT-based solutions.

The government’s decision to defer the implementation of higher tax collected at source (TCS) on overseas spending is judicious as it will allow stakeholders a breather to calibrate their systems.

The finance ministry on June 28 said that the higher TCS on overseas spending will now be implemented three months after the original deadline of July 1.

It said transactions conducted via international credit cards while overseas will not be included in the Liberalised Remittance Scheme (LRS) and they will not be subject to TCS even after October 1.

“This is a judicious decision by the government – deferment was necessary,” said Amit Jain, a partner at law firm BTG Legal.

However, he noted that the Central Board of Direct Taxes should issue a detailed circular before October 1 guiding credit card companies to adopt a "uniform" approach, specifically on big-ticket items such as business travel.

“CBDT should clarify the documentation and declarations banks should seek to exclude business travel from the ambit of LRS and TCS,” Jain said.

Acting on feedback

The finance ministry said credit card spending by a person abroad will not come under LRS and will therefore not attract TCS. If a person uses a credit card while in India for permissible overseas transactions, then that would come under LRS and attract TCS if it exceeds Rs 7 lakh in a year.

The ministry said it was decided to make “suitable changes” in response to comments and suggestions received.

“In a welcome move, the government took this feedback on board and announced some positive changes. Not only were the changes deferred to October 1, 2023, now, any money sent abroad up to a limit of Rs 7 lakh won't be subject to this tax,” said Ankit Jain, a partner at CA firm Ved Jain & Associates. “This is a big relief for a lot of people as they won't have their money tied up in tax refunds anymore.”

The ministry said the deferment was made to give banks and card networks adequate time to put in place the requisite IT-based solutions.

Keshav Singhania, head of private client practice at Singhania & Co., noted that the deferment allows banks and credit card systems to iron out procedural difficulties such as keeping track of spends from other credit cards, reversal of transactions, and distinction between credit card expenses for various purposes.

“The bitter aftertaste post the initial merry-go-round of announcements has been put on the backburner till the fine print of the FAQs and legislative amendments are rolled out,” he said.

In March, finance minister Nirmala Sitharaman said the Reserve Bank of India had been asked to bring credit card payments for foreign tours under the purview of the LRS because such payments escaped tax collection at source. The move came after it was proposed in the Union Budget for FY24 that TCS for overseas packages be increased to 20 percent from 5 percent.

The government said in a notification dated May 16 that it had removed the exemption on the use of international credit cards from LRS for payments made to meet expenses while on a visit outside India. The notification had caused a lot of confusion.

“The latest announcement provides some respite to various stakeholders,” said S Vasudevan, executive partner at Lakshmikumaran & Sridharan Attorneys.

He noted that certain changes proposed earlier this year in the TCS scheme, including the increase in the rate which were supposed to come into effect from July 1, have been postponed to October 1.

“This will provide a breather to everyone and afford more time to get ready to implement the change,” he said.

Pallav Pradhyuman, a partner at chartered accountancy firm CNK Partners, said the government has recognised the concerns of banks as well as sections affected by the TCS levy and has removed the impracticable elements.

“While the additional time should certainly help, the route to transaction identification is not going to be easy,” he said.