Analysis of 20% TCS on International Credit Card Usage: Facts & Implications

Introduction: The imposition of a 20% Tax Collection at Source (TCS) on international credit card usage has generated discussion and confusion. This article provides a comprehensive analysis of the situation, including an examination of the relevant provisions, background information, and the implications of the changes in TCS rates and the Liberalised Remittance Scheme (LRS). It also explores the relief measures offered by the government and the availability of TCS credit.

Background: The Liberalised Remittance Scheme (Commonly referred to as the ‘LRS’), introduced by the Reserve Bank of India (Common referred to as the ‘RBI’), enables resident individuals to remit money abroad for personal purposes without requiring prior approval. The scheme allows remittances up to USD 250,000 per financial year.

Section 206C(1G) of the Income Tax Act provides for collection of TCS on remittance of the amount under the LRS by resident Individuals and on sale of overseas tour program package to resident individuals.

Vide Finance Act, 2023, the rate of TCS for the specified remittances under LRS and overseas tour program package was revised at 20% effective from 1st July, 2023 from erstwhile 5% which is applicable till 30th June, 2023.

TCS rate on International Credit Card Usage and Remittance

Thereby, the effective rates of TCS will be as follows:

It is evident from the table that, effective from July 1, 2023, there will be a change in the TCS rate to 20% from the current 5% for the sale of overseas tour program packages and remittances under LRS, except for medical and education loan purposes.

Is TCS under LRS applicable to Non-residents?

The LRS applies to resident Individuals. The remittance rules for NRIs for remittance of funds from NRE, NRO and FCNR accounts are not covered by LRS. Therefore, TCS is not applicable for remittance made by non-residents.

Is TCS applicable for purchase of foreign currency or forex pre-paid cards?

Yes, Tax Collected at Source (TCS) is applicable for the purchase of foreign currency or forex pre-paid cards under the Liberalized Remittance Scheme (LRS). When purchasing foreign currency or forex pre-paid cards under the LRS, authorized dealers or banks will collect TCS at the rate of 20%.

Understanding the LRS and International Credit Card Usage:

The recent buzz surrounding the imposition of a 20% Tax Collection at Source (TCS) on international credit card usage has caused confusion.

When traveling abroad, a person could use international debit cards, international credit cards or other methods for undertaking the various transactions (for easy understanding, consider it as the LRS transactions at present).

Previously, Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000 exempted usage of international credit card for expenses incurred while on travel abroad, from LRS limit. Due to the exemption under the erstwhile rules, expenditures through credit cards were not accounted for the specified LRS limit which led to some individuals exceeding the LRS limit. So, one can say that differential treatment was given for ‘International Credit Card’ as compared to the ‘International Debit Card’ which should not be ideally the case without any specific reason.

However, a recent notification on May 16, 2023, removed the LRS exemption given to the use of international credit cards for meeting his expenses when he is abroad. Consequently, payments made through both international debit cards and international credit cards are now treated equally. This removal of the exemption has sparked speculation that a 20% TCS will be imposed on international credit card usage.

The removal of the special exemption for international credit cards simply puts them on par with debit cards. As a result, both debit and credit card transactions made overseas will fall under the purview of the LRS, leading to the collection of TCS. Further, there will not be flat 20% TCS on usage of international credit card rather it will be dependent upon the situation as mentioned in supra table i.e., 0.5%, 5% or 20% as applicable in that situation.

Government Offers Relief by Exempting TCS on International Card Transactions:

To ease procedural ambiguity and address public concerns, the Government has announced a significant relaxation on 19^th May 2023. According to the clarification, any payments made by individuals using their international debit or credit cards, up to Rs. 7 lakh per financial year, will be excluded from the ambit of the Liberalized Remittance Scheme (LRS) limits. Consequently, International credit card or international debit card transactions upto Rs. 7 Lakhs per financial year will not attract any TCS.

The initial notification issued on 16^th May 2023 aimed to bring international debit and credit cards on an equal footing by removing the exemption previously enjoyed by international credit cards. However, this move inadvertently led to positive outcomes. Instead of eliminating the exemption for international credit cards, the government has decided to extend a similar exemption to international debit cards.

Is Credit of TCS available by filing Income Tax Returns?

Yes, the credit of TCS (Tax Collected at Source) is available to the payee under certain conditions. If the TCS payee is a taxpayer, they can claim credit for the TCS against their regular income and adjust it against their income tax liability while filing their income tax return.

However, if the TCS payee is not required to pay any income tax, the only option to claim a refund of TCS is by filing the Return of Income and claiming the TCS refund in that return. The interest on such refund will be calculated starting from the beginning of the next financial year until the grant of the refund.

Is the Rs. 7 Lakh Exemption Threshold Limit Qua the Remitter or Qua the Authorised Dealer?

The exemption threshold limit of Rs. 7 lakhs in respect of LRS remittances towards medical treatment and/or education abroad and/or international debit/credit card payments, is to be considered qua the resident individual (remitter) and not qua the TCS collector or qua the Debit/Credit Card. The aggregate LRS spends of resident individuals, in a financial year, are compiled and monitored by RBI, based on PANs of such individuals.

If a resident individual conducts LRS transactions through multiple authorized dealers/bankers or international debit/credit cards, the threshold exemption limit of Rs. 7 lakhs within a year will be calculated based on the collective amount spent across all authorized dealers/bankers and debit/credit cards. It is not assessed independently for each authorized dealer/banker or debit/credit card.

Conclusion:

It is essential to dispel the confusion surrounding TCS on international credit card usage. The recent change primarily removes the differential treatment between international debit and credit cards, ensuring that both payment methods are subject to the same regulations. Therefore, it is not the introduction of a new tax but the removal of a previous exemption, resulting in the collection of TCS on overseas transactions made with international