20% TCS on International Credit Card Transactions: All You Need to Know

In India, the months of April and May are considered vacation months, and super-rich parents or couples seek to take themselves or their children on an international journey. The travel dates as well as expenses for this year or the upcoming years might have been set. However, the Central Government has introduced something that will clog your pockets and pre-planned budgets.

The Foreign Exchange Management (Current Account Transaction) Rules, 2023 were put into effect by the government in consultation with the Reserve Bank of India (RBI), and now credit card transactions are also subject to the $250,000 Liberalised Remittance Scheme cap. Any foreign remittance or purchase over and above this limit will need prior RBI approval.

Due to this modification, a higher rate of collection of 20% Tax Collected at Source (TCS) from 5% will be applied on the use of overseas credit cards. Given that it will go into effect on July 1, 2023, this modification will undoubtedly have an impact on travellers' travel expenditures.

Previously, the International Credit Cards were not covered by the Liberalised Remittance Scheme (LRS). Due to a recent change in the FEMA (current account transactions) rules that removed rule 7, it is now possible to include overseas transactions to pay for travel-related expenses in the LRS.

Liberalised Remittance Scheme

The Liberalised Remittance Scheme (LRS) is a part of Foreign Exchange Management Act, 1999 which states about outward remittance from India.Under the scheme, all resident individuals, including minors, are allowed to freely remit up to $250,000 (up to ₹20,640,000) per financial year i.e. April to March. If they want to use above the limit, they have to get prior approval from the Reserve Bank of India.

The permitted reasons to remit under this scheme are travelling and tourism to countries except Nepal and Bhutan, emigration, employment abroad, medical treatment expenses abroad, meeting expenses of close relatives abroad, education ..etc. It is pertinent to note that TCS under LRS are applicable to all types of transactions.

Tax Collection at Source (TCS)

Tax Collection at Source is an additional amount collected as tax by a seller of specified goods from the buyer at the time of sale over and above the sale amount. Section 206C of the Income Tax Act of 1961 specifies the products which TCS applies to. And from July 1, 2023, the International Credit Card Transactions will be covered under Section 206C(IG) of Income Tax Act.

Section 206C(1G) OF Income Tax Act, 1961

According to Section 206C (1G) of the Income-tax Act of 1961, an authorised dealer who receives money for remittance outside of India from a buyer who is a person remitting money outside of India under the Reserve Bank of India's Liberalised Remittance Scheme or who is a seller of an overseas tour programme package from a buyer who is a person purchasing such a package is required to collect tax at the rate of 5% of the package's cost. Now the 5% has been changed to 20% since the Union Budget 2023.

However, there is no change in the education and medical treatments. It will continue as 5%. 20% TCS is applied to overseas tour programs like payments for tickets, booking hotels..etc. and also on expenses other than education and medical treatments.

Rate of Tax Collection at Source on International Credit Card Transactions

Prior to the Union Budget 2023, the rate was 5% for remittances exceeding limits of rupees 7 Lakhs, but the government increased it by 15% under LRS, i.e. 20%. The TCS collected on international credit card transactions will be 20% as of July 1st 2023.

Tax Collection at Source Refund Claim

The claim for refund on Tax Collection at Source can be done similarly as of Tax Deduction at Source (TDS). When completing their income tax return, the taxpayer who paid TCS under LRS may claim a tax credit.

TCS on LRS Calculation with an Example

Suppose the total remittance of a taxpayer is Rs. 20,00,000. The 20% TCS of Rs. 20,00,000 is Rs. 4,00,000. You have to pay ₹2,00,000 for TCS on tour packages from July 1st 2023 with any other taxes may be charged by the government if any. Depending on your spending and expenses, the amount can change.

The taxpayer can claim the TCS refund when they file income tax returns. Or if the total income filed for returns filing is Rs. 50,00,000, then the taxpayer has to pay only Rs. 46,00,000 and the rest Rs. 4,00,000 will be adjusted against TCS balance.

Impact on Cardholders

Holidays for leisure tend to be pricey. The new law will, however, significantly affect a particular group of people. The 20% TCS will undoubtedly hurt people's finances and travel aspirations for a variety of reasons. For international travel, the majority of consumers use their credit cards to pay for expenses that were not listed in the LRS. Due to the high outward remittances, the Central Government and Reserve Bank of India decided to include the international credit card transactions into the LRS in which the card holders had to pay 20% TCS for their expenses abroad.

As was already noted, different people may travel for a variety of reasons. People who pay for medical bills must also deal with these taxes, which will seriously damage their capacity to maintain a stable financial situation. The government has to give a proper clarification tax rate on the credit card used for medical purposes or for other leisure expenses.

new amendment in the rate of TCS after the budget and the section 206C(1G) of Income Tax Act states that 5% TCS will remain the same for education and medical treatments. As the government included the International Credit Card transaction to LRS, the taxpayers need a proper clarification.

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