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TCS on overseas credit card spend unlikely from Monday

The plan to bring overseas credit-card spend above a threshold under the Liberalised Remittance Scheme (LRS) and a 20% tax-collected-at-source (TCS) is unlikely to be implemented from April 1, as the government is inclined to defer it again till the elections are over, sources from the government and banks told FE on condition of anonymity.
The roll-out of the scheme, first announced in Budget FY23 with an aim to put a lid on rising outward foreign remittances, was put in abeyance after it created a flutter among Indians seeking to study abroad, and the HNI community. The plan to postpone its implementation further is despite most banks having put in place the necessary IT infrastructure.
The government’s move followed a rising incidence of international credit card spend by Indians above the annual LRS limit for an individual of $2,50,000. Outbound remittances under the LRS has been rising relentlessly in recent years, with much of the transactions being carried out during overseas travel by Indians. In April-January this fiscal, such remittances rose 24% on year to $27.4 billion.
In June 2023, the finance ministry issued a clarification, saying LRS would not apply to international credit card spends by Indians till banks and card companies put in place required IT-based solutions. It also restored the limit of Rs 700,000 for overseas credit card spending (barring expenses on medical treatment and education) on which no TCS would be levied. The Budget proposals, after the tweaks in the June notification, were to take effect from October, but that was not to be.
Now, to bring in overseas credit card spends under LRS, the government would have to issue another notification, which shall supersede the June order, say experts. “A notification deleting Rule 7 of the Foreign Exchange Management Act (FEMA), which provides exemption in respect of credit card expenses from LRS is necessary for the implementation of the plan,” said Ved Jain, former president of The Institute of Chartered Accountants of India (ICAI).
Most of the banks are not expecting the implementation of TCS on international credit card spends from Monday. “We have not received any communication so far from the government regarding the implementation of TCS on international credit card spends from April 1. So we are not expecting it to start from Monday. However, our system is in place and we are ready to start whenever we are asked to go live,” said a senior official of a public sector bank. Some bankers, however, said that banks should be given more time and the deadline should be extended.
“There is no official notification to go live yet. Yes, we have put in place some offline processes. This is a very complex thing to do because you need to have the ability to check real-time from the Reserve Bank of India portal on the quota consumed by the customer,” said head of credit cards of a leading private bank. For the new system, banks will need to build capabilities to tie all the spends together and track them, he added. “We have submitted our request to the government to evaluate the best scenario and extend the deadline because it is the customer experience that we need to manage. I hope we get some time to implement this,” he added.
“For TCS on international credit cards spends, banks will have to track each transaction of customers and will require a relevant management information system. Our systems are in place to track customer transactions comprehensively, including expenditures across various products such as debit cards,” said a senior official of another public sector bank.
The ministry had said the primary impact of the move would only be on investment in assets such as real estate, bonds, stocks outside India by HNIs and on tour travel packages or gifts to non-residents. The hefty 20% TCS, however, raised concern, as it would lead to blocking of funds. The ministry said TCS can be claimed back while filing income tax refunds or as a credit and adjust it against advance tax.
Experts further say that there are challenges in distinguishing between corporate and personal expenditures without issuing separate credit cards for each purpose, which means identifying the taxable expenditure under LRS would not be easy. “Also, the task of accurately allocating LRS limits will pose difficulties, especially in scenarios involving multiple users,” said Saurabh Bhalerao, associate director, CareEdge. Surabhi Marwah, Tax Partner, EY India, said: “As of now, spending in forex in India is still a grey area. Banks presently do not have a mechanism to track LRS for such payments. But it is possible that RBI may insist banks to track the spending.”
Sandeep Sehgal, Partner- Tax, AKM Global said: “Once the RBI has sufficient satisfaction that the bankers have necessary systems in place to track overseas credit card spending, RBI can issue a notification in this regard, post which the relevant provision under the Income tax for TCS on LRS will apply.” But the RBI guidelines will be issued, after the finance ministry notification.
The June 28 circular said the new threshold of Rs 0.7 million per financial year per individual will be there for TCS on all categories of LRS payments, through all modes of payment, regardless of the purpose. Beyond this Rs 0.7 million threshold, TCS shall be levied at the rate of 0.5% if remittance for education is financed by an education loan, 5% in case of remittance for education/medical treatment and 20% for others. On the purchase of overseas tour packages, as per the plan, TCS of 5% will be applicable on payments up to Rs 0.7 million. Above the Rs 0.7 million threshold, 20% TCS would be levied.
Currently, overseas tour packages and LRS spending attract 5% TCS an there is no threshold.
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