Hitherto, while payments made by debit cards overseas were treated as funds remitted under the liberalised remittance scheme, there was a specific exemption for usage of international credit cards on international visits. Recently, the RBI (Reserve Bank of India) removed the exemption for credit cards because why should only credit cards have all the fun!
One of the reasons mentioned by the Government behind such a move is that such credit cards were being used for overseas purchases in excess of the current LRS (Liberalised Remittance Scheme) limits of USD 250k. Not only does the removal of this exemption lead to bringing within the ambit of LRS all expenditure made abroad using international credit cards, but such usage will also attract an additional tax of 20% to be collected as TCS (Tax Collected at Source).
Interestingly, to bring some relief to small transactions, the Ministry of Finance in a late evening move on May 19th, exempted payments up to ₹7 lakhs in a financial year using international debit or credit cards from the LRS limits.
It is important to understand the mechanics and implications of such TCS on the taxpayers. As an illustration, suppose a person makes a purchase of ₹10,00,000 overseas in June 2023 through his credit card. The Bank will collect TCS at 20% on amounts exceeding ₹7 lakhs which will amount to ₹60,000 and such ₹60,000 will be deposited to the Government.
The taxpayer can either consider this as a credit while depositing advance taxes or apply for a refund when he files his income tax return in July 2024. The next question that pops up is whether the Government will pay interest on such a refund amount.
The government pays interest at 0.5% (per month) but only from the beginning of the next financial year to the date of refund (i.e, from April 1, 2024 till the date of refund in the instant illustration). Clearly, from an individual taxpayer perspective, there is a cash flow blockage that gets involved. Considering the annual LRS limits of USD 250k, the tax involved is USD 50k.
Let’s flip the coin and understand the challenges for the banks who are entrusted with the responsibility to collect and deposit the TCS. It will be imperative for the banks to understand whether any overseas purchase by a person leads to crossing the threshold of ₹7 lakhs for the financial year.
A person may carry multiple debit/ credit cards across banks and hence how would one bank know that a purchase of a luxury handbag in the morning that was just below the threshold but a cup of coffee in the evening on another card has breached the threshold and hence TCS should be collected on this purchase of a cup of coffee? There are severe interest and penalty provisions for default in collecting TCS from the customers.
Interest at 1% (per month) and penalty at 100% for failure to collect TCS from the customers will be levied on banks if they default in collecting TCS. Perhaps, banks might find it easier to just collect TCS on every penny of purchase made overseas instead of relying on any undertakings from their customers!
This amendment brings a balance of inconveniences to the banks and the taxpayers i.e., an increase in compliance burden for the banks and blockage of capital in refunds due to taxpayers.
Where the intent of the government is just to bring the overseas payments under a scanner, a nominal TCS rate could have been levied instead of a whopping rate of 20%. It will be interesting to look at the detailed circulars/ FAQs by the Government in this relation.
Vaibhav Gupta is Partner and Pooja is Principal at Dhruva Advisors LLP.
