Since announcing that credit card transactions outside India will attract 20 percent Tax Collected at Source (TCS) from 1 July, the Union Ministry of Finance had to clarify matters twice in two days.
First, it published a set of FAQs on Thursday, 18 May, that sought to clear the air around the new rules for the Liberalised Remittance Scheme (LRS).
Then, on Friday, 19 May, it issued another clarification in the form of a press release.
The latest: As per the press release, "any payments by an individual using their international Debit or Credit cards upto Rs 7 lakh per financial year will be excluded from the LRS limits and hence, will not attract any TCS."
Other exemptions: The new tax rate will also not be applicable for the following types of credit card transactions:
Transactions for education purposes
Transactions for medical purposes
The Centre has amended the rules under the Foreign Exchange Management Act, 1999, to ensure that credit card spends are covered under the Liberalised Remittance Scheme (LRS). The move, which was first announced in the Union Budget 2023-24, was done in consultation with the Reserve Bank of India (RBI).
Why it matters: The 20 percent TCS on overseas credit card transactions comes at a time when Indians are making up for foreign vacations lost during the COVID-19 pandemic.
While international purchases above Rs 7 lakh by the Indian credit cardholder could get costlier, there is little clarity on whether this will affect online purchases, too.
What Is TCS?
TCS is collected by the seller from the buyer on the purchase of any item. This is different from Tax Deducted at Source (TDS) which looks to collect tax directly from the source of income.
While taxpayers can still apply for TCS refunds when filing their tax returns, fintech expert Ravisutanjani pointed out that "very few percentage of people would be willing to block 20% working capital or savings with government."
"This move will act as a barrier and people would rather move to Cash, Help from Friends and other alternatives," he opined on Twitter.Expand
By the numbers: In FY2022-23, Indians reportedly spent $12.51 billion on overseas travel. This was a 104 percent increase from the last fiscal year, when COVID-19 travel restrictions were still in place.
As per RBI data, in FY2022, domestic travellers shelled out a total of $6.13 billion in international destinations.
Of note: Foreign outward remittances above $250,000 (or Rs 2.06 crore) will require prior approval from the RBI, as per the Union Budget 2023-24.
Some perspective: Reacting to the government's flip-flop on the TCS charges, economics professor Deepanshu Mohan asked, "Could the government have not thought about these considerations before making the announcement and riling people up?"
"This isn’t one isolated instance too. Much of the economic policy-making space under the current government’s decision-making architecture suffers from a lack of instituting any critically reflective feedback loop or even learning from its own past mistakes," he said.
(This article was updated following the Finance Ministry's clarifications on 18 and 19 May 2023.)