By - King Stubb & Kasiva on December 1, 2023
In a significant move aimed at streamlining foreign exchange transactions, the Ministry of Finance (“MoF”), in consultation with the Reserve Bank of India (“RBI”), introduced a pivotal amendment to the Foreign Exchange Management (Current Account Transactions) Rules, 2000 on May 16, 2023[1]. The amendment, often referred to as the 2023 Amendment, eliminates the differential treatment between debit and credit cards concerning overseas spending and brings all international credit card transactions under the purview of the Liberalized Remittance Scheme.
Before delving into the implications, it is crucial to understand the backdrop against which this rule change has occurred. The Liberalized Remittance Scheme (“LRS”) is a framework introduced by the RBI in 2004 to facilitate international transactions for Indian residents smoothly.
Initially capped at USD 25,000, the LRS limit has evolved over the years and currently stands at USD 250,000 per financial year.[2] However, the recent surge in global spending by Indian residents prompted regulatory intervention.
Until the recent amendment, Tax Collected at Source (“TCS”) under the LRS was at 5% for remittances exceeding Rs 7 lakh. However, the new rule mandates a uniform 20% TCS for all, with exceptions only for transactions related to medical treatment or education.[3]
The essence of this new rule lies in imposing a 20% TCS on international credit card transactions. TCS is essentially a form of tax collected by the seller from the buyer at the point of sale. In the context of foreign remittance transactions, this tax is collected when individuals spend money abroad using international credit cards.
The journey of this rule commenced with the Union Budget 2023-24[4], where the government proposed a significant increase in TCS rates, transitioning from the existing 5% to a substantial 20%, effective from July 1, 2023. This move was part of a broader amendment to the Foreign Exchange Management Act, specifically targeting overseas tour packages and funds remitted under the Liberalized Remittance Scheme. This primary goal was aimed to enhance tax compliance and curb tax evasion in foreign remittances.
Toillustrate the impact of the 20% TCS with a hypothetical scenario, let’s consider a traveler, Ritu, with a credit card limit of ₹4 lakh. During her international vacation to Singapore, she incurs total expenses of ₹2 lakh. With the new TCS rule, Ritu would now have to pay ₹40,000 (20% TCS) upfront. The total amount spent, including TCS, becomes ₹2.4 lakh. It is essential to note that this TCS can be claimed only at the time of filing an Income Tax Return (“ITR”).
The key change brought about by the 2023 Amendment is the omission of Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000. Rule 7, which exempted the use of international credit cards from certain LRS provisions, was deemed a hindrance to the goal of capturing total expenditures under the LRS and ensuring uniformity in foreign exchange management.
Before the 2023 Amendment, international credit card transactions in India were subject to Rule 5 of the Foreign Exchange Management Rules[5].
The government’s move to increase the TCS rate is aimed at achieving multiple objectives. Firstly, it intends to curb tax evasion on specific goods and services, ensuring individuals pay their fair share of taxes. Secondly, it seeks to bring parity in the treatment of different modes of drawing foreign exchange, including credit cards, debit cards, forex, and bank transfers.
The implementation of the 20% TCS rule is expected to impact high-value international transactions, especially those exceeding Rs 7 lakh. While the government argues that this will bring transparency and accountability to overseas spending, experts express concerns about the compliance burden on both card-issuing banks and consumers.
Banks and credit card issuing institutions now face the challenge of adapting their operations to integrate data seamlessly and facilitate the ease of filing income tax returns for their customers. The new rule requires these institutions to ensure compliance with the amended regulations and provide clarity to cardholders regarding the implications of the changes.
Financial experts have weighed in on the implications of the TCS rule. Pranay Jhaveri, MD - India and South Asia, Euronet, highlights the immediate increase in cash outflow for travelers and its potential impact on overseas tour packages. Tax experts like Ajay Rotti and Harsh Madhusudan express concerns about the applicability of TCS on international credit cards and its potential impact on business travelers.
In response to public concerns, the Ministry of Finance issued clarifications and frequently asked questions (“FAQs”) on May 19, 2023. These clarifications provide insights into the reasons behind including international credit card payments in the LRS and address concerns about TCS on small transactions (up to Rs 7 lakh).
As the new rule comes into effect, Indian consumers using international credit cards for foreign transactions need to be mindful of the changes. The increased TCS rate and the inclusion of credit card spending in the LRS have implications for both individual travelers and the banking industry. Navigating these changes requires careful planning, compliance with regulations, and an understanding of the evolving tax landscape.
TCS on international credit card transactions can be claimed at the time of filing an Income Tax Return (“ITR”). It is essential to track TCS entries in Form 26AS.
The increase in the TCS rate to 20% was motivated by a need to address instances where LRS payments were disproportionately high compared to disclosed incomes. This move is part of broader efforts to enhance tax compliance and prevent tax evasion in foreign remittances.
The 2023 Amendment eliminates the differential treatment between debit and credit cards, ensuring that all international credit card transactions are subject to the same regulations under the LRS. This promotes consistency, fairness, and effective monitoring of foreign exchange expenditure.
[1] Notification no. G.S.R. 369(E), Dated May 16, 2023.
[2] https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=1834#:~:text=There%20are%20no%20restrictions%20on,limit%20of%20USD%202%2C50%2C000..
[3] https://incometaxindia.gov.in/communications/circular/circular-10-2023.pdf.
[4] https://www.indiabudget.gov.in/doc/budget_speech.pdf.
[5] https://incometaxindia.gov.in/Documents/Provisions%20for%20NR/provision-for-non-resident-fema-current-account-transactions-rules-2000.htm.
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