In a significant turn of events, the Ministry of Finance has reversed its earlier decision and announced that credit card transactions conducted abroad will be exempt from the tax collected at source (TCS) on foreign transactions.
Additionally, the implementation of the higher TCS rate of 20 percent, originally slated for July 1, has been deferred until October 1. These developments aim to ease the financial burden on individuals and provide relief for foreign transactions.
What is TCS?
Tax Collected at Source (TCS) is an additional tax levied by the seller on top of the sale amount for a specific good or service. The TCS amount is collected by the seller at the time of sale and then deposited to the tax authorities. It is worth noting that the TCS paid can be adjusted against the individual's tax liability when filing an income tax return.
Why did the Ministry of Finance reverse its decision?
The Ministry of Finance decided to postpone the implementation of TCS on credit card transactions abroad to provide banks and card networks with sufficient time to establish IT-based solutions. This postponement allows transactions through international credit cards while overseas to be excluded from the Liberalised Remittance Scheme (LRS) and not subject to TCS.
Will credit card transactions made abroad attract TCS?
No, credit card transactions made while the user is abroad will not attract TCS under the current ruling. However, it's important to note that international payments using a credit card made while the user is in India would attract TCS if they exceed the Rs. 7 lakh threshold.
What are the revised TCS rates and when will they be effective?
The proposed increase in TCS rates, initially scheduled to be implemented from July 1, will now come into effect from October 1. However, the revised rates of 20 percent will only apply to amounts exceeding ₹7 lakh in a financial year. Transactions below this threshold will not be subject to TCS.
Are there any exceptions to the revised TCS rates?
Yes, foreign expenditure on education and health will continue to attract lower TCS rates. For educational expenses, if the remittance is obtained through a loan from an approved financial institution, the TCS rate will be 0.5 percent.
Remittances above ₹7 lakh for educational purposes not obtained through a loan will be subject to a TCS of 5 percent. Similarly, outward remittances for medical treatment will also attract a TCS of 5 percent if the threshold is crossed.
How does the postponement benefit banks and card networks?
The decision to postpone the implementation of TCS on credit card transactions abroad allows banks and card networks to develop and implement the necessary IT-based solutions to comply with the revised regulations effectively.
Commenting on the same, Russell Gaitonde, Partner, Deloitte India said, “The press release issued by the Ministry of Finance on the new TCS rule on foreign remittances is a welcome move. This will provide banks and NBFCs more time to update their IT systems to be able to implement the new TCS rule."
“The Government has also decided to suspend its earlier notification of May 16, 2023, wherein transactions undertaken by Indian residents while travelling abroad using their international credit cards were brought within the ambit of the LRS limit of US$ 250,000 per individual per financial year. Resultantly, transactions undertaken will not be counted as LRS and will not attract TCS.”
"While one can continue to debate whether the increased TCS rate of 20% is very high, and ought to have been lowered, at least the Government in its yesterday’s press release has made unequivocally clear that it is committed to increasing the TCS rate from 5% to 20%, therein indirectly signaling that it wishes to discourage the sizeable outflows that are being annually made overseas by Indian residents through the LRS route,” he added.
The government's decision to exempt credit card transactions made abroad from TCS is expected to provide significant relief to individuals and facilitate seamless international payments. Staying updated on the revised regulations will help individuals navigate their credit card transactions effectively and avoid any unexpected tax obligations.