New rule for international credit card users: 20% TCS to apply under LRS under Indian Tax Rule

NEW RULE FOR INTERNATIONAL CREDIT CARD USERS: 20% TCS TO APPLY UNDER LRS UNDER INDIAN TAX RULE

Spending in foreign exchange through international credit cards will be covered under the RBI’s liberalised remittance scheme (LRS). On May 16, the Finance Ministry notified the amended rules under the Foreign Exchange Management Act (FEMA), which has brought credit card spending outside India under the LRS. Earlier, the usage of international credit cards (ICCs) for making payments for fulfilling expenses during travel outside India was not included in the LRS limit. Only debit cards, forex cards, and bank transfers were included.

According to the notification, the Finance Ministry, in consultation with the RBI, has omitted Rule 7 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, thus effectively including forex spending through international credit cards under the LRS.‘Rule 7’ exempts overseas use of international credit cards from ‘Rule 5’, which mandates prior approval from the Reserve Bank of India.

This would essentially mean that a TCS levy of 5% will come into effect on such transactions till July 1 (except for medical and education-linked sectors) with immediate effect, which would then increase to 20% after July 1.

Although the TCS thus collected can be adjusted against the tax payable at the end of the year but this would mean to pay 20% extra on all overseas spending and may discourage Indian Residents in using credit cards for overseas spending.

Banks issuing credit cards will have set up processes for compliance and their burden will increase as a large number of Indians travel abroad and credit cards are commonly used for payments.

Further, employees may now be averse to using their cards for overseas travel expense and will have to chalk out alternative methodology for the employee to pay overseas while travelling.

Further, individual will also have to keep track of the TCS collected by the card being reflected on 26AS statement.

For further information, please contact Kamal on info@luthraadvisors.com.