Spendings in foreign exchange or using the international credit cards for any transaction will now be recovered in Reserve Bank of India (RBI)’s Liberalised Remittance Scheme (LRS) after the Ministry of Finance’s latest diktat aimed at monitoring the usage of credit cards for the purpose of foreign travel more closely and avoiding the payments escaping tax collection at Source. (TCS).
With amendments to the Finance Bill 2023, the government had indicated change in the rules for including credit card transaction done outside India under ambit of LRS so that such transactions attract TCS. In Budget 2023, the Finance Minister had announced the revision of TCS rate to 20 per cent from 5 per cent on overseas tour packages. The earlier capping of INR 7 lakh applicable for charging TCS was also removed.
Last month, Finance Minister Nirmala Sitharaman had asked RBI to look into ways to bring credit card payments on foreign tours under LRS. Following which, the Ministry issued an amended rule under the Foreign Exchange Management Act, which is applicable from July 1. The hike in TCS rate is also applicable from the same date.
What is rule and how it has changed?
The notification brings transactions through credit cards outside India under the ambit of the LRS with immediate effect, which means 20 per cent TCS will be applicable on all overseas credit card or other payments from July 1.
Prior to this, the usage of an international credit card to make payments towards meeting expenses during a trip abroad was not covered under the LRS. The spendings through international credit cards were excluded from LRS by way of Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000. With the latest notification, Rule 7 has now been omitted, paving way for the inclusion of such spendings under LRS.
The rule strictly applies to the payment and purchase of foreign goods and services.
The concept of TCS is primarily aimed at widening the tax base, preventing tax evasion, and ensuring the smooth collection of taxes. Simply put, it shifts the responsibility of tax collection from the government to the person making the payment.
Taxpayers would be able to claim the 20 per cent TCS back at the time of filing income tax returns but that means blocking a certain of your trip for a considerable amount of time until one gets refund in their account.
Impact on outbound travel?
So, travellers planning overseas trips or foreign tours post July 1 will have to shell out extra 20 per cent money on all the transactions done via any payment method. They will now also find it hard to make large overseas spending over and above the LRS limit. Individuals with high spending on international transactions will now need to carefully plan their foreign remittances to ensure compliance with the regulations and avoid any violation of norms.
Under the LRS scheme, Indian residents are allowed to remit up to USD 250,000 (approximately INR 2.06 crore) per year without any prior approval from the RBI.
Another change is that now all kinds of payments and transactions done pertaining to foreign travel or a trip abroad, including overseas tour packages will attract 20 per cent TCS. With the Budget announcement, this was only applicable on the packaged tours but now even if someone plans on their own, buys it from a foreign travel agency, the same rate of TCS will be applicable.
Spends under debit cards, forex cards or travel cards will continue to be liable to be under TCS.
What experts say?
According to tax experts, the move may also lead to a higher tax outgo for many individuals. Experts are hoping that the Government would provide more clarity on how the tax authorities would distinguish between international purchases on the internet and credit card spending abroad.
This shall lead to a huge initial outlay of funds at the time of the transaction undertaken through ICC outside India, but it can be claimed/adjusted while filing the return. This amendment can negatively impact the tourism sector along with foreign investment into real estate/stocks. The Government’s intention is clear at increasing the tax buoyancy and widening the tax base,” said Manas Chugh, who is a CA and Expert – Investment and Taxation at Osgan Consultants.
Abdul Hadi Shaikh, Co-Founder & CEO, FlyRemit, Bengaluru-based digital overseas payment platform feels that This is a much needed rationalisation of TCS application and will equalise the impact between Indian resident travel companies and online overseas travel players.
“This also puts to rest the B2B vs B2C debate on application of TCS. The amendment in this year’s Budget had already resolved the applicability on tour package versus standalone booking and conclusively discarded the INR 7 lakh limit confusion in the industry. Overall, it has created a level playing field for all,” he added.
What industry has to say?
According to Rikant Pittie, Co-Founder, EaseMyTrip, the new amendment will result in an additional financial obligation for Indian travellers when making credit card payments while traveling abroad.
“This increase in initial travel costs is estimated to be around 20 per cent. It is important for Indian travellers to consider this factor when planning and budgeting for their overseas travel expenses. With this amendment, there is a possibility that domestic travel within India may become more attractive to travellers. This shift in preference could potentially boost domestic tourism, as travellers may choose to explore destinations within the country to avoid the additional costs associated with international travel,” he said.
Mohit Kabra, CFO, MakeMyTrip feels that bringing credit cards under TCS purview will ensure parity between debit and credit card payments.
“It is essential to maintain consistency of TCS across payment mechanisms. This will also bring transactions done on global platforms under the TCS net as the customers’ card issuing bank will now be mandated to levy TCS on such transactions. A customer can choose either domestic travel agents or a global OTA or book directly with an overseas service provider (such as a hotel) when it comes to international travel. If the upfront price and payment includes TCS for bookings made with domestic travel agents and its without TCS for bookings made on global platforms, there could be a significant loss of business for the domestic travel industry,” Kabra opined.
Will travel get costly?
Even with credit cards being brought under the TCS net, the initial pricing of international platforms will remain untouched. The card issuing bank will be responsible for TCS for payments made via global platforms or directly to overseas travel service providers. So, if a USD 100 booking is made and paid on an international platform or with an international hotel directly, the customer will see the price as USD 100 and pay only USD 100 at the time of booking. TCS of USD 20 will be levied later by the customer’s card issuing bank.
However, when booking and paying with domestic travel agents, the customer will see a price of USD 120 and pay USD 120 under the current process. Domestic travel agents’ prices will appear to be more expensive to their international counterparts at face value / upfront.