Credit card forex payment: The what, why and how of 20% TCS on foreign transactions

In a recent change, the finance ministry amended the rules under the Foreign Exchange Management Act (FEMA) to bring international credit card spending under the LRS or Liberalised Remittance Scheme. This essentially means credit card spending abroad will now be a part of the LRS limit of $250,000. Moreover, tax collected at source for transactions under the LRS was also increased from 5% to 20%. These new rules will be applicable from July 1st 2023.

Any transaction that goes over the $250,000 limit, would need an approval from the Reserve Bank of India. Earlier, only payments via debit card, bank transfer and forex cards were under LRS. Now foreign spending via credit card is also included under the scheme.

This decision to increase the tax on the credit card spending received a lot of backlash.

Following this, the government clarified that the TCS will be applicable only for payments that go over Rs 7 lakh per financial year.

Government's Rationale
The government’s rationale for this move is that while payments made by debit cards were already covered under the LRS, expenditures by credit cards were not accounted for, which has led to some exceeding the $250,000 limit and bypassing the LRS rules. This move, the govt says, will remove the differential treatment between debit and credit cards and the total expenditure under LRS will be properly captured.

Here are five scenarios and the impact that this change will have:

• Any spending of up to Rs 6 lakh outside India (other that buying a tour package)
  Impact: In this case, no TCS will be applicable.
  
  
• Spending of Rs 8 lakh outside India for medical expenses
  Impact: TCS of 5% the amount that is above Rs 7 lakh – Rs 5,000 in this case.
  
  
• Spending of Rs 8 lakh outside India for education
  Impact:
  1) In case of an education loan: TCS of 0.5% would apply.
  2) Without an education loan: TCS of 5% would apply.
  
  
• Spending of Rs 8 lakh for any expenditure abroad (excluding taking a tour package)
  Impact: TCS of 20% would apply on the amount that is above Rs 7 lakh. Hence, you will have to pay Rs 20,000 as TCS in this case.
  
  
• For any travel package irrespective of the cost of the package
  Impact: 20% TCS will apply.

Who gets the TCS?
The tax collected at source goes to any authorised dealer. In case of spending via credit cards it goes to the bank.

TCS refund
A user can get back the tax collected at source while filing for Income Tax returns. As per the government notification, you can deduct the TCS from the tax you would be paying for that financial year or get a refund in case you don’t come under the tax paying ambit.

What would be the implications?
Many tax experts believe that the increase in the TCS will create a crunch in the cash flow and influence the spending pattern. The government included credit cards under the LRS to keep a track of the overseas expenses. However, many experts feel that this could have been done even without increasing the TCS rate.

Meanwhile, the All-India Association of Authorized Money Changers & Money Transfer Agents have asked the government for specific clarification regarding small value transactions involving Foreign Currency Cash, Wire Transfers through Banks, Prepaid Forex Cards, and other International payment options widely used by individuals during overseas trips for leisure or employment.