Credit card spends outside India will also get roped within the ambit of the overall cap of $250,000.- Any credit card purchase overseas will now attract
TCS if it is not meant for purposes of education or medical treatment. - TCS will also apply when you pay for subscription of international magazines, through your credit card.
Consequently, starting from July 1, such credit card transactions will be subject to a higher rate of tax collected at source (TCS) at 20%.
The Central government, in collaboration with the Reserve Bank of India, effected the amendment through a notification this week.
In Budget 2023-24, the government raised the TCS on expenses under LRS to 20% without any threshold, for all expenses excluding education and medical treatment. Currently LRS has a limit of $250,000 (around ₹2 crore), and any remittance above this needs approval from the Reserve Bank of India (RBI).
“By virtue of this notification, payments made through international credit cards outside India will fall within the purview of the LRS scheme. This essentially means that credit card spends outside India will also get roped within the ambit of the overall cap of $250,000. This is irrespective of the fact that whether such spends are for personal or business purposes and there is a consequential TCS impact,” says Riaz Thingna, partner, Grant Thornton Bharat LLP.
This means that 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.
While the above may not apply to most people, the new rule means that any credit card purchase overseas will now attract 20% TCS if it is not meant for purposes of education or medical treatment.
Previously, the use of international credit cards for expenses incurred during trips abroad was not considered part of the liberalised remittance scheme (LRS). “In order to apply TCS on foreign remittances and foreign spends under LRS, an amendment was proposed in Section 206C(1G) of the Income Tax Act wherein TCS @20% was proposed on remittances for foreign spends. The payment for these foreign spends could also be made via international credit cards, which was not under RBI scanner apropos Rule 7 of FEMA Rules 2000,” says Vivek Jalan, partner, Tax Connect Advisory.
Rule 7 of FEMA (Foreign Exchange Management Act) Rules 2000 pertains to the prohibition on transactions in foreign exchange, foreign security, and immovable property by a person resident outside India
“The finance minister while answering in the Parliament asked the RBI to find out ways by which this could also be tracked by deleting this Rule 7 of FEMA (Current Account Transaction) Rules 2000 all foreign spends even by international credit cards will also be liable to TCS @20%,” says Jalan.
Post the budget announcement, only package tours were subject to 20% TCS. Now that is no longer the case. TCS will apply even if you plan a foreign trip on your own. When one travels abroad one needs to make a lot of payments. For example, when travelling to Paris, an entry to a museum could cost you €100. You would have to pay TCS on that, even if you book it from India with a credit card before you travel.
Also, if you buy a Starbucks latte or take an Uber when travelling abroad, you have to pay 20% TCS. TCS will also apply when you pay for subscription of international magazines, through your credit card.
“Another impact is that when travelling abroad, you can use your credit card only till 80% of your credit limit. You can get a tax credit on this, but it will affect your cash flow,” says B. Srinivasan, director and founder, Shree Sidvin Investment Advisors. For example, since the banks will be using 20% as TCS, if one has a ₹5 lakh credit limit, one can only use ₹4 lakh.
Also Jalan clarifies that spends via international debit cards and travel cards would continue to be liable under TCS, since they were never outside the ambit of TCS under Rule 7 of FEMA Rules 2000.