In Budget 2023, significant alterations were announced regarding the Tax Collection at Source (TCS) system for payments made under the Liberalised Remittance Scheme (LRS) and on overseas tour program packages including a 20% Tax Collection at Source on Foreign Remittance Transactions effective from October 1, 2023.
These changes were slated to become effective from July 1, 2023. Additionally, credit card payments were planned to be incorporated into the LRS as per the announcement made in March. A plethora of comments and suggestions were received, all of which have been meticulously reviewed, according to the Ministry of Finance.
In response to the feedback and suggestions, it had been resolved to make appropriate amendments. Firstly, it has been decided that the TCS rates will remain unchanged for all LRS-related purposes and overseas travel tour packages, regardless of the mode of payment, for amounts up to Rs. 7 lakh per individual per annum. Furthermore, an extension of the implementation timeline has been granted for the revised TCS rates and the inclusion of credit card payments in LRS. The details of these changes are outlined below.
Sub-section (1G) of section 206C of the Income-tax Act, 1961, deals with Tax Collection at Source (TCS) on (i) foreign remittance through the Liberalised Remittance Scheme (LRS) and (ii) the sale of overseas tour program packages.
Through the Finance Act 2023, amendments were made to sub-section (1G) of section 206C of the Act. These amendments, among other things, raised the TCS rate from 5% to 20% for remittances under LRS as well as for the purchase of overseas tour program packages and eliminated the Rs 7 lakh threshold for triggering TCS on LRS. However, these changes did not apply to remittances made for education or medical purposes. The effective date for these amendments was set earlier for July 1, 2023.
The Government had issued an e-gazette notification dated May 16, 2023, amending the Foreign Exchange Management (Current Account Transactions) Rules, 2023, to remove the differential treatment for credit cards in comparison to other modes of foreign exchange drawal under LRS.
Following discussions with various stakeholders and considering the feedback received, the following decisions have been made:
To provide adequate time for Banks and Card networks to implement necessary IT-based solutions, the Government had opted to defer the implementation of the gazette notification from May 16, 2023. Consequently, transactions through International Credit Cards while being overseas will not be categorized under LRS and thus will not be subjected to TCS. The Press Release dated May 19, 2023, was thereby superseded.
ii) The Rs. 7 Lakh threshold per financial year per individual in clause (i) of sub-section (1G) of Section 206C will be reinstated for TCS on all categories of LRS payments, regardless of the payment mode. Thus, for the first Rs. 7 Lakh remittance under LRS, no TCS shall be applicable. Beyond this Rs. 7 Lakh threshold, TCS rates shall be as follows:
a) 0.5% (if remittance for education is financed by an education loan);
b) 5% (in case of remittance for education/medical treatment);
c) 20% for others.
For the purchase of overseas tour program packages under Clause (ii) of Sub-section (1G), the TCS shall continue to apply at the rate of 5% for the first Rs. 7 lakhs per individual per annum; the 20% rate will only apply for expenditures above this limit.
iii) The increased TCS rates will be applicable from October 1, 2023: The increase in TCS rates, initially set to be effective from July 1, 2023, will now come into effect from October 1, 2023, with the modifications as detailed in (ii) above. Until September 30, 2023, the earlier rates (prior to the amendment by the Finance Act 2023) will continue to apply.
The implementation of a 20% Tax Collected at Source (TCS) on credit card transactions for international purchases and the integration of credit card transactions into taxable categories will affect everyday consumers, not just those who are affluent.
In this situation, when an employee uses their personal credit card for expenses reimbursed by the employer, withholding tax is deducted from the individual’s card unless a corporate credit card is issued. Corporate credit cards are usually reserved for senior executives, and using such a card for expenses classifies them as business expenditures, exempt from TCS.
However, at present, there is no stipulated date from which Credit Cards will be brought under the purview of LRS. Meanwhile, the proposed higher rates and elimination of threshold is set to be implemented from October 1.
The following important points are to be kept in mind while calculating your total tax liability within the Liberalised Remittance Scheme (LRS).
Credit Card Transactions and TCS Exemption
Currently, transactions made through credit cards fall outside the purview of the Liberalised Remittance Scheme (LRS) and are not subject to Tax Collection at Source (TCS). In simple terms, TCS is not applicable to credit card transactions. It’s important to note that debit cards and forex cards do fall under LRS regulations, and the application of TCS depends on the purpose of the transaction.
PAN-Based Threshold Calculation and Applicability
To determine TCS applicability, the cumulative expenditure across all authorized banks or dealers during the financial year is considered. Individuals need to monitor their combined expenses across various transactions and institutions throughout the financial year to comply with the threshold limits. The threshold limit of Rs 7 lakhs is reassessed and set on an annual basis, potentially changing from one financial year to another.
Notably, this threshold is linked to an individual’s Permanent Account Number (PAN). Regardless of conducting Liberalised Remittance Scheme (LRS) transactions through different banks, the threshold calculation is based on the PAN. Hence, individuals must monitor their overall remittances and LRS-related expenses to comply with the relevant thresholds.
TCS as a Tax Credit and Form 26AS
Tax Collection at Source (TCS) is not a standalone tax; rather, it is regarded as a tax credit. This credit is documented in Form 26AS, an annual statement of the taxpayer’s tax-related data. Taxpayers can offset this TCS credit against their tax liability while filing their Income Tax Returns (ITR), effectively reducing the final tax payment. Additionally, taxpayers can utilize the TCS amount to offset advance taxes, aiding in managing tax liabilities throughout the financial year.
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